Steps in a Business Transaction. Part One. Term Sheets.

In this blog series, I’ll discuss the steps in a business transaction. Of course, the steps in any particular transaction will depend on its objectives and complexity. Buying a company, licensing technology, financing your business, merging with another business, or partnering with another company for a project are all business transactions; however, each may not require all the steps I’ll discuss in this series.

Hence, my comments are general. Let’s start with term sheets.

Many transactions begin with a term sheet.  It might go by a different name such as letter of intent or deal memorandum. A term sheet outlines the key elements of your deal. Think of it as a road map for your transaction. At a minimum, your term sheet should include the following:

• the parties’ names
• a description of what each party gets from the deal (normally an asset or a service)
• the price or compensation to be paid
• a time frame for completion of the deal

Term sheets can, and typically do, include many more deal points. The additional points depend on the specific deal and might include mention of a due diligence review, a non-compete, and closing conditions.

Typically, the term sheet is only a few pages long. If the transaction is very simple, your “term sheet” might just be a string of email correspondences between the parties with bulleted points outlining how you expect the deal to be structured. On the other end of the spectrum, I’ve been involved in deals – mostly joint ventures or licensing agreements - where the term sheet became the de facto binding, definitive agreement or at least functioned as such for a year or more while the definitive agreement was negotiated.

A term sheet is not an absolute requirement for every transaction. It is possible to go straight to negotiation of the long-form, definitive agreement which I’ll discuss in my next posting. 

Comments

[Selling a Business]

This post is a must read if you have, or not sure whether you want to sell your business. The process of selling a business can be very stressful but by using a term sheet, which basically takes note of the key points of the business deal, makes things much more clear. It also confirms between the two involved parties that a deal is possible and prevents wasting time. This would definitely be something to consider.