Buying or sell a business is an intensive process: the business in question is valued, due diligence is carried out, and negotiations are conducted.
Among other things, about the purchase price, guarantees, exit, non-compete, shareholder agreement and other (resolutive) conditions.
This process begins with recording the intent of seller and buyer in a Term Sheet or in a Letter of Intent, also known as a Letter of Intent (LOI). But what is the difference between the two? What should be included and when is the document binding? As a corporate law attorney, I would be happy to explain it to you.
The same purpose
Both documents have the same purpose: to record the intention of the seller and buyer to negotiate with each other in order to reach a signed purchase agreement. Both documents record preliminary agreements and name the most important conditions for the purchase or sale.
In addition to this listing of points for further negotiation, it also sets out the timeline of the acquisition process. Term Sheet and Letter of Intent are therefore important starting documents for further negotiations between seller and buyer.
Difference in form
The difference between a Term Sheet and Letter of Intent is mainly in the form. The letter of intent is often more elaborate. If intentions and conditions are comprehensively recorded, the letter of intent is already much like the content of a purchase agreement.
A Term Sheet is usually more concise. The more elaborate and detailed the intentions and conditions are recorded in these start-up documents, the less room there is in the contract phase for negotiating the transaction documentation (including the purchase agreement).
Is it binding or not?
In any case, what is binding is the agreement not to negotiate the purchase or sale of the business with other parties for a certain period of time. Agreements on confidentiality and secrecy are also binding. Furthermore, the agreements in a Term Sheet are not binding. This means that, in principle, the parties are not yet committed to anything and can abandon the purchase or sale at any time.
It is important to formulate the provisions in the Term Sheet in such a way that it is clear what the parties are or are not obliged to do. The moment a provision is formulated in a binding way, the agreement is not non-binding and the parties must comply with the agreed upon arrangements.
What does it say?
No term sheet or letter of intent is the same, simply because no two acquisitions are the same. However, many of the same topics do appear in them. Topics that are important to include are:
- buyer, seller and target
- type of transaction (e.g. stock transaction or asset/liability transaction)
- the duration
- timeline
- (purchase price
- right to have due diligence carried out
- secrecy
- exclusivity
- non-compete or relationship clause
- staff
- conditions precedent
- guarantees
- indemnities
Tips
- Once a Term Sheet or Letter of Intent is signed, you cannot simply walk out of the negotiations, even though many of the provisions included are not binding. It is therefore important to think about the content of the document as well as this beforehand.
- In mergers and acquisitions, the financial stakes are often high. Therefore, it is wise for you to seek proper advice.
- By clearly setting out the agreements between parties, there is less chance of discussion between the parties and you will not encounter unpleasant surprises.
