Selling a business
An Overview of Term Sheets
What a term sheet or letter of intent covers in a company sale, which parts bind you, and what a seller should negotiate before signing.
By Michael D. Rubin, CEO & Founder · Updated September 2026 · 803 words
A term sheet is a short, mostly non-binding summary of the main terms of a proposed deal, such as price, payment structure, conditions and timing, that both sides agree on before lawyers draft the binding contract. In the sale of a privately held company, the same role is usually played by a letter of intent, or LOI. The names differ; the purpose is the same: to confirm there is a deal worth pursuing before both sides spend heavily on due diligence and legal work.
For a seller, this is the point of greatest leverage. Once you sign and grant the buyer exclusivity, you usually stop talking to other buyers, so anything left vague in the term sheet will be negotiated later from a weaker position.
Term sheet versus contract
A term sheet signals that the parties have agreed on the main points and intend to proceed. Most of its provisions are not legally binding: either side can usually walk away if due diligence or negotiations fail. The purchase agreement that follows is the binding contract, running to many pages and covering every detail.
Some provisions in a term sheet are typically binding, though, commonly confidentiality, exclusivity for a set period, and who pays which expenses. Which parts bind you depends on the wording, so have your transaction attorney review it before you sign. If a provision you care about is meant to be binding, such as a limit on how the buyer may use your information, make sure the document says so clearly.
What a term sheet usually covers
| Term | What it sets out | What a seller should watch |
|---|---|---|
| Price | Headline value of the deal | Whether it assumes no debt and no excess cash |
| Structure | Cash at closing, seller note, earnout, rollover | How much is paid later or depends on results |
| Working capital | Level left in the business at closing | How the target is calculated |
| Conditions | Financing, diligence, key approvals | Open-ended conditions that let the buyer delay |
| Exclusivity | How long you stop talking to others | A period long enough to close, not longer |
| Your role | Transition period, employment or consulting | Length, pay and duties |
| Timeline | Target dates for diligence and closing | Realistic dates with consequences for delay |
The benefits and the risks
A good term sheet saves time and money. It forces both sides to confront the important questions early, surfaces disagreements while they can still be resolved, and gives attorneys a clear framework for the final documents. Deals that start with a detailed, well-understood term sheet tend to have fewer surprises at the end. It also gives the buyer's lender an early look at the structure, which can reveal financing problems before anyone has spent heavily.
The risk is the reverse. Putting terms on paper can expose a gap that ends the conversation, which is better learned early than late. The larger danger for a seller is a vague term sheet: a high headline price with loose language on working capital, earnouts or conditions invites the buyer to reopen the price after you have stopped talking to anyone else.
What to negotiate before you sign
The time to be precise is before you sign, while other buyers are still interested. Use these points as a starting list with your advisor and attorney:
- Be specific about how much of the price is paid at closing and how much later, and on what terms.
- Define the working capital target, or the method for setting it, rather than leaving it for later.
- Keep exclusivity as short as the buyer can reasonably use, with a clear end date.
- Limit the conditions to real ones, such as financing and diligence, and ask for evidence that financing is realistic.
- Settle the points that matter to you personally, such as your transition role and key employee terms.
If an earnout is proposed, insist on clear definitions of the targets and how they will be measured. After signing, due diligence and the purchase agreement follow; see what happens after you receive a letter of intent. Many of the terms that decide what you actually keep sit beyond the headline number, as the article on deal terms that matter besides price explains.
How MDR & Associates handles term sheets and LOIs
We negotiate multiple letters of intent at the same time, so the terms of each are compared side by side while competition is still in play, and we present every offer to the owner in person. A principal of the firm is in every negotiation, working with your own transaction attorney on the language. Before you sign, we walk through each line with you, including what it means for the cash you would actually receive at closing. The full sequence is in our ten-step process. To discuss an offer you have received or a sale you are planning, contact us.
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Questions owners ask next
Is a letter of intent the same as a term sheet?
In practice, largely yes. Both summarize the main terms of a proposed deal before the binding purchase agreement is drafted. In private company sales the document is usually called a letter of intent, while term sheet is more common in investment rounds, but the purpose is the same.
Can a buyer walk away after signing a term sheet?
Usually yes, because most provisions are not binding, although confidentiality and exclusivity typically are. That is why a seller should ask for evidence of financing, keep exclusivity short and make the key terms specific before signing, since leverage falls once other buyers are set aside.