Buying a business
Why Business Brokerage Professionals Use Term Sheets
What a term sheet is, what belongs in one beyond price, which parts bind you, and why it keeps a business sale from unraveling later.
By Michael D. Rubin, CEO & Founder · Updated September 2026 · 858 words
A term sheet is a short, mostly nonbinding summary of the main terms of a proposed sale, and advisors use one because it makes buyer and seller agree on the essentials, in writing, before anyone pays attorneys to draft a purchase agreement. It turns a verbal understanding into something both sides read the same way, and it exposes disagreements while they are still cheap to resolve. When more than one buyer is interested, it also gives the seller something concrete to compare.
In lower-middle-market sales the terms are often set out directly in a letter of intent, and the two labels are sometimes used interchangeably. Either way, it comes after the first buyer meetings and before due diligence, as in our ten-step process.
What a good term sheet covers
Price is one line of many. A useful term sheet answers who is buying, exactly what is being bought, how much is paid and how. Not every term will be settled at this stage; the aim is to agree on the ones that shape value and risk, and to name the ones still open so nobody is surprised later. Our list of the deal terms that matter beyond price goes deeper on each of these.
| Term | What it settles |
|---|---|
| Price and structure | The headline value, and whether the buyer acquires the assets or the ownership of the company |
| Cash at closing | How much the seller receives on the day the deal closes |
| Seller note | Any part of the price the seller finances, with its term and interest |
| Earnout | Any part of the price that depends on results after closing, and how it is measured |
| Working capital | The level of cash, receivables and inventory the business must hold at closing |
| Real estate | Whether property is included, leased to the buyer or excluded |
| Seller's role | Transition period, consulting or employment agreement, non-compete |
| Conditions | Financing, due diligence and any approvals the deal depends on |
| Exclusivity and timing | How long the seller stops talking to other buyers, and the target closing date |
What is binding and what is not
The business terms in a term sheet are normally nonbinding: either side can still walk away, and the final deal is set by the purchase agreement. A few provisions usually bind from signature, typically confidentiality, exclusivity (often called a no-shop clause) and who pays which expenses. Read those carefully. Exclusivity in particular removes the seller's leverage with other buyers for as long as it runs.
Nonbinding does not mean meaningless. Backing away from a signed term sheet without good reason damages trust, and the party who does it usually pays for it later in the negotiation. Working capital is the term most often left vague and then fought over; our guide to how working capital affects the purchase price explains why it needs a precise definition.
Why advisors insist on one
A term sheet does three jobs. It orients everyone, since the attorneys, accountants and lender all work from the same summary. It exposes gaps: if the parties cannot agree on paper about the seller's role or the size of the note, they would not have agreed in a purchase agreement either. And it saves money, because legal drafting starts only once the business deal is settled, instead of being rewritten each time a term moves.
It also cuts down on late surprises, one of the most common reasons deals fall apart. A term raised for the first time in the final week of drafting looks like a retrade, an attempt to change the deal, even when it is not. Every late surprise also costs time, and time works against every deal.
Keep it balanced, and specific
The goal is a deal both sides want to close. Term sheets built from rigid boilerplate, or opened with extreme positions to see what the other side will swallow, tend to start an adversarial negotiation that lasts until closing. Work with advisors who tailor the terms to the company and the buyer, write numbers and definitions rather than intentions, and settle the points that matter now. A vague term sheet only postpones the argument.
Agree on the working rules as well: who speaks for each side, and how quickly each will respond to a revised draft. A negotiation moves at the speed of its slowest party, and a term sheet that sits unanswered for two weeks sends the same signal as a lukewarm offer.
How MDR & Associates uses term sheets and letters of intent
MDR & Associates represents sellers of Texas companies with $3 million to $100 million in annual revenue. We negotiate multiple letters of intent at the same time, so an owner can compare price, cash at closing, notes, earnouts and conditions side by side, and a principal of the firm is in every negotiation. Every offer is presented to the owner in person, and the owner decides whether to accept, reject or counter. Where an offer looks generous on price but thin on cash at closing or heavy on conditions, we explain the difference before the owner responds. Sellers and buyers who want to talk through a proposed deal can contact the firm.
Where this fitsBuy a business in Texas →
Questions owners ask next
Should my attorney review a term sheet before I sign it?
Yes. Even though most of it is nonbinding, the clauses on confidentiality, exclusivity and expenses have real effect, and the business terms will shape the purchase agreement. A transaction attorney can flag vague language and structural choices, such as assets versus stock, that are expensive to change later.
How long should exclusivity last?
It is negotiated, and it should last only as long as the buyer genuinely needs to finish due diligence and financing. Sellers should resist open-ended exclusivity and tie any extension to visible progress, because while it runs they cannot talk to other buyers.