Business Sales – why a Terms Sheet counts
When it comes to selling a business, the precise details of negotiations between a buyer and a seller presents numerous challenges. Before starting to draft any formal legal documents, it is best to prepare a term sheet that reflects all the most important parts of the deal. Terms Sheets must state as precisely and simply as possible the fundamental terms (such as price) and conditions (such as due diligence) of a sale and will act as a touchstone throughout all further negotiations. By clearly stating the basic terms, the parties can get on and negotiate the finer legal points of a formal contract with confidence there is mutual agreement to buy and sell. Inevitably, there is a process of push and pull regarding the finer points of a contract, but by having a signed Terms Sheet defining the fundamentals, parties are more likely to avoid disputes.
What is a Term Sheet?
A term sheet is a non-binding document that outlines the terms and conditions of a potential business transaction. It is usually signed early in the phases of sale negotiations and serves as a starting point for more detailed legal agreements to be prepared and signed later.
A term sheet is a document that outlines the terms and conditions of a proposed business sale, whether it is in the form of an asset sale or a share sale. Very different considerations apply for each and it is critical that key conditions are identified at the outset. This might be how to deal with work in progress, earn out of future contract profit, or payment of dividends prior to the date for completion. A Terms Sheet is not legally binding for an absolute sale, but it is binding in terms of confidentiality and exclusivity in dealing with the other party.
It serves as a starting point for negotiations and can be used as a backup reference point during the due diligence process, when a buyer is checking the details of the business or company.
Term sheets typically include details on the purchase price, financing, governance, and other important terms of the transaction, such as profit multiples. Terms Sheets can be used in many different types of business transactions, including mergers of companies, acquisitions of smaller companies, and investments in shares in a trading company.
Why are Term Sheets Necessary for the Sale of a Business?
There are many reasons why term sheets are necessary for the sale of a business:
- TO PROVIDE A CLEAR UNDERSTANDING OF THE TRANSACTION:
By specifying all the fundamental details of the transaction, including the purchase price, payment terms, completion date, and any conditions that need to be met before a final agreement is reached. This helps both parties have a clear understanding of what is expected of them and helps avoid misunderstandings or legal disputes later.
Negotiating the terms of a business sale can be a time-consuming and expensive process as it is very resource-intensive and requires legal, accounting, lending time and expertise. A term sheet allows both parties to discuss quickly and efficiently the key terms of the transaction and reach a point where the balance of the terms between buyer and seller are agreed to be mutually beneficial as recorded in the agreement. It helps to clearly define the terms of the deal upfront, which can help to avoid lengthy and costly legal negotiations later.
- HELP TO PROTECT BOTH PARTIES:
Serves as a legal document that can be used to protect the interests of both the seller and the buyer in the event of a dispute. A term sheet can include provisions that protect both the buyer and seller, such as confidentiality clauses and exclusivity provisions. It clearly outlines the terms and conditions of the sale, including any warranties or indemnities that may be included.
Finance and Tax Considerations
One of the most important considerations in any business deal is the financial requirement to fund the purchase price as well as any adjustments or expenses required in the transfer of ownership. Term sheets will often include details on the purchase price, financing arrangements, and any conditions that may affect the final price.
It’s important to carefully review and understand the financial terms of a term sheet, as they can have significant implications for the buyer or seller. For example, the purchase price may be structured as a combination of cash, debt, and equity plus post-sale consulting expenses, or it may include contingencies such as earn-out provisions that could affect the final price.
Tax considerations are also an important part of any business deal, and term sheets should include details on how taxes will be handled or adjusted between the parties as part of the transaction. This may include information on the tax implications for the buyer and seller, as well as any GST considerations as a going concern, tax credits, or incentives that may be available.
Inclusions and Conduct
Term sheets may also include provisions related to physical assets such as vehicles, stock, plants, fixtures, and fittings. These are important considerations, as they can have a significant impact on the value of the business. For example, if a business includes valuable manufacturing equipment or unique technology created by the seller, this could be a major selling point for the buyer and should be included on the term sheet.
In addition to physical assets, term sheets may also include provisions related to the conduct of the business and parties involved during the negotiation and due diligence processes. This may include restrictions on the seller’s ability to take on new debt or make significant changes to the business during this time.
Due Diligence and Legal Considerations
Due diligence is the process of thoroughly researching and evaluating a business before entering a contract. It’s an important step in the term sheet process, as it helps ensure that both parties have a clear understanding of the risks and opportunities associated with the transaction.
During the due diligence process, buyers typically review a variety of documents and perform various analyses to assess the financial health, legal status, and overall viability of the business. This may include reviewing financial statements, contracts, trademarks, business names, logos, patents, and other legal registrations.
In addition to financial and legal due diligence, term sheets may also include provisions related to liquor licences, intellectual property, and restraint of trade to be imposed after completion on the individual Directors. For example, the term sheet may specify which intellectual property assets will be transferred as part of the deal or outline any restrictions on the use of the business’s trade names or brands.
Checklist for the Sale or Purchase of Shares
If you are considering the sale or purchase of shares in a business, there are a few key points you should consider before signing any document:
- Price: The price for the shares or assets being sold or purchased should be clearly stated in the term sheet. This can include the total purchase price, as well as any payment terms or contingencies.
- Ownership and control: The term sheet should outline the percentage of ownership and control the buyer will have over the shares of the company after the transaction is completed.
- Management and employment: It’s important to clarify any changes to management and the employment of key staff or Directors that will result from the sale or purchase of shares.
- Liabilities and warranties: The term sheet should outline any liabilities or warranties that are assumed by the buyer or seller because of the transaction.
- Closing conditions: The term sheet should specify any conditions prior to completion that must be met before the transaction can be finalised and the balance purchase price paid. These can include regulatory approvals, financing arrangements, and other contingencies.
Think carefully before you sign and always get legal advice before you do. There may be binding obligations, such as confidentiality, non-compete, or exclusive dealing clauses, that will be enforceable against you.
Call us now and ask us how to best draft a Terms Sheet that suits your circumstances.
Contact Tony.Crilly@Perspectivelaw.com or call 07 3839 7555.