What is Term Sheet?

Risk: Medium. Non-binding on price, but binding on exclusivity and confidentiality.

What it is

A term sheet is a short, usually non-binding outline of proposed acquisition economics before a full LOI or APA. It captures price range, structure, financing sources, working capital, earnout concepts, closing conditions, and sometimes binding confidentiality or exclusivity language.

Why it matters in your deal

For a self-funded ETA searcher, the term sheet is the fast filter between serious outreach and legal-document spend. It gives the seller concrete economics without forcing the buyer to overcommit before QoE, financing, customer, and legal diligence. Poorly drafted term sheets can still create binding process obligations.

Real example

A searcher proposes a $3.825M price for an HVAC business based on 4.5x $850K trailing adjusted EBITDA. The term sheet states 50% SBA financing, 25% seller note at 6% over 7 years, 25% buyer equity, 10% holdback, and a $250K normalized working capital target. If diligence later changes adjusted EBITDA, the price should adjust because the term sheet tied value to confirmatory diligence.

Red flags to watch

•Price stated as final instead of expressed as a formula subject to confirmatory diligence
•Binding exclusivity included without a clear deadline, seller-delivery milestones, or financing carveout
•Working capital target omitted, leaving net purchase price to be fought at the APA stage
•Sources and uses missing, especially seller note, SBA loan, rollover, equity, and holdback assumptions
•Confidentiality or expense language broader than the buyer can operationally comply with

What to do

1Use a price formula tied to adjusted EBITDA, working capital, debt, cash, and confirmatory diligence.
2Label binding provisions clearly and keep economics non-binding unless counsel intentionally says otherwise.
3Show the expected financing stack so the seller understands SBA, seller note, equity, and holdback dependencies.
4Set working capital methodology early, even if the final target is refined later.
5Move to an LOI only after the seller accepts the economic frame and the buyer is ready to spend on counsel.

Sources

Clause guide

Go from definition to the real contract behavior

This term is easier to understand when you see how it behaves inside a live agreement. These clause guides show what makes the language risky, what Inkvex checks, and what to push on before you sign.

High attention→

Closing Conditions

The conditions that must be satisfied before either party is obligated to close the deal.

Common in: Asset purchase agreements, Stock purchase agreements

High attention→

Customer Concentration Clause

Customer concentration disclosures and the indemnification language that protects buyers when a top customer leaves.

Common in: Asset purchase agreements, Disclosure schedules

High attention→

Earnout Clause

Contingent purchase price tied to post-close performance, and why most earnouts pay less than projected.

Common in: Asset purchase agreements, Stock purchase agreements

High attention→

Escrow Holdback

The portion of purchase price held in escrow to fund post-close indemnification claims.

Common in: Asset purchase agreements, Stock purchase agreements

High attention→

Fundamental Reps

The category of representations that survive longer and have higher caps than general reps in an SMB acquisition.

Common in: Asset purchase agreements, Stock purchase agreements

What AI Misses in High-Stakes ContractsRead more →

How Inkvex catches this

Inkvex identifies binding sections, financing dependencies, purchase-price formulas, working capital language, exclusivity dates, and confidentiality scope. It scores risk on a 1-10 scale and quotes the term-sheet provisions that may survive even if the acquisition does not close. This is legal information, not legal advice, and the term sheet should become a first-pass for your attorney before the LOI stage.