Buying a business
The Importance of the Term Sheet
What a term sheet contains, how it differs from a letter of intent, and why agreeing terms in writing early prevents costly misunderstandings.
By Michael D. Rubin, CEO & Founder · Updated September 2026 · 719 words
A term sheet is a short written summary of the main terms of a proposed deal, including price, structure, what is included and the key conditions, that the buyer and seller agree on before lawyers draft the full documents. It turns a verbal understanding into something both sides can read and check. Done well, it prevents the misunderstandings that surface weeks later and derail a deal.
Term sheets get little attention compared with purchase agreements, yet they shape everything that follows. A clear one answers the basic questions of who is buying, what is being bought, how much is being paid and how.
Term sheet versus letter of intent
In practice the two overlap. A term sheet is often a simple list of terms, sometimes informal, used to confirm the outline of a deal. A letter of intent (LOI) usually covers the same ground in letter form and adds process terms such as exclusivity, confidentiality and a timeline. In many lower middle market sales, the LOI does the job of the term sheet. Some buyers use a term sheet first to test the outline informally, then convert it into an LOI once the seller responds.
Either way, the business terms are usually not binding, while clauses on exclusivity and confidentiality usually are. This article on what happens after a letter of intent picks up where the term sheet ends.
What a good term sheet covers
| Term | What to spell out |
|---|---|
| Price | The headline number, and whether it buys assets or ownership interests |
| Payment | Cash at closing, any seller note, any earnout and its targets |
| What is included | Real estate, equipment, inventory, receivables, intellectual property |
| Working capital | The level of working capital to be delivered at closing |
| Seller's role | Length and pay of any consulting or employment agreement |
| Employees | Commitments on key staff, retention or benefits |
| Restrictions | Non-compete and non-solicitation terms |
| Conditions | Financing, due diligence, landlord and other consents |
| Timing | Target dates for due diligence and closing |
Why putting it in writing helps
Two people can leave the same meeting with different memories of what was agreed. A written summary exposes those differences while they are still cheap to fix. It also gives each side's attorney and CPA something concrete to review, so problems with structure or taxes come up before the definitive agreement is drafted rather than after. It also shows a lender what the deal looks like, which helps a buyer start financing early.
Working capital is a common example. The cash, receivables and inventory a business needs to run day to day must be left in it at closing, and a price agreed without a working capital target can shift noticeably when the final numbers are counted. See how working capital affects the purchase price.
Keep it collaborative
A term sheet should move a deal forward, not start a fight. Advisors who draft extreme positions, or pile boilerplate onto what should be a simple summary, slow things down and make the other side defensive. Plain language, reasonable terms and a shared aim of reaching a deal both sides accept work better. Consulting agreements, non-competes and the treatment of real estate deserve particular care, because they are often where a seller's personal priorities and a buyer's financing needs meet. If a point cannot be settled yet, mark it as open rather than forcing language one side will later resist.
When to prepare one
Use a term sheet once price and structure are broadly agreed in conversation, but before either side spends heavily on lawyers and accountants. Too early, and it becomes a negotiation in itself. Too late, and the parties may already have paid for due diligence without settling the basics. In a competitive sale, the seller's advisor often asks interested buyers for written terms at the same stage, so offers can be compared like for like rather than by headline price alone.
How terms get set in our deals
When MDR & Associates represents a seller, we negotiate multiple letters of intent at the same time where we can, so each offer's terms can be compared side by side, and a principal reviews every offer with the owner in person. We can also help structure SBA, conventional and seller-financed terms through business financing. Buyers can learn how to access the companies we represent on our buyer page.
Where this fitsBuy a business in Texas →
Questions owners ask next
Is a term sheet legally binding?
Usually the business terms are not, which is what lets both sides keep negotiating and walk away if due diligence turns up a problem. Specific clauses, such as confidentiality or exclusivity, may be binding if the document says so. Have your transaction attorney review the wording before you sign anything.
Who drafts the term sheet?
Often the buyer proposes it, since it is effectively an offer, but either side or its advisor can prepare the first version. What matters is that both sides' attorneys review it and that it reflects what was actually agreed, not what one side hoped had been agreed.