A non-binding term sheet is a preliminary agreement between two parties that outlines the key terms of a potential transaction. It is not a legally binding contract, but it serves as a starting point for negotiations and helps both parties understand each other’s expectations.
Non-binding term sheets are often used in mergers and acquisitions, joint ventures, and other complex business transactions. They can also be used in less formal situations, such as when two individuals are negotiating a contract for the sale of a car or a house.
Non-binding term sheets typically include information such as the purchase price, the financing terms, the closing date, and the conditions to closing. They may also include other provisions, such as representations and warranties, covenants, and indemnification.
Key Considerations
When drafting a non-binding term sheet, it is important to keep the following key considerations in mind:
**Purpose**: What is the purpose of the term sheet? Is it to outline the key terms of a potential transaction, to serve as a starting point for negotiations, or to document the understanding of both parties?
**Clarity**: The term sheet should be clear and concise. It should be easy to understand and should not contain any ambiguous or confusing language.
**Completeness**: The term sheet should be complete. It should include all of the key terms of the potential transaction, including the purchase price, the financing terms, the closing date, and the conditions to closing.
**Negotiability**: The term sheet should be negotiable. It should not be so one-sided that it is unacceptable to one of the parties.
**Enforceability**: The term sheet is not a legally binding contract. However, it may be used to create a legally binding contract later on. As such, it should be drafted in a way that is enforceable.
Format
Non-binding term sheets typically follow a standard format. They typically include the following sections:
**Introduction**: This section introduces the purpose of the term sheet and identifies the parties involved.
**Transaction Terms**: This section outlines the key terms of the potential transaction, including the purchase price, the financing terms, the closing date, and the conditions to closing.
**Representations and Warranties**: This section contains representations and warranties made by each party regarding the accuracy and completeness of their disclosures.
**Covenants**: This section contains covenants made by each party regarding their conduct during the negotiation and closing process.
**Indemnification**: This section contains provisions indemnifying each party against certain losses or liabilities.
Conclusion
Non-binding term sheets are a valuable tool in the negotiation process. They can help to clarify the expectations of both parties, identify potential areas of agreement and disagreement, and serve as a starting point for drafting a legally binding contract.
When drafting a non-binding term sheet, it is important to keep in mind the key considerations discussed above. By following these considerations, you can create a term sheet that is clear, complete, negotiable, and enforceable.
