The M&A Term Sheet / LOI Decoded for Founders

01What an M&A Term Sheet / LOI Is, and What Is Binding

An m&a term sheet, or letter of intent (LOI), is the document a buyer hands you once they are serious enough to want an agreed outline before spending money on lawyers and diligence. It sets out the shape of the deal on a few pages: what they are buying, roughly what they will pay, how the process will run, and the key conditions. The two names are used interchangeably; the substance is the same.

The single most important thing to understand about a term sheet or letter of intent is what is binding and what is not. Read almost every commercial line as a statement of intent. The price, the structure, the reps & warranties: all of it is expressed as what the parties intend, subject to due diligence and to the definitive agreement being signed. In other words, the buyer is not yet committed to buying, and you are not yet committed to selling on those exact terms.

A small number of clauses, however, are binding from the day you sign. The usual binding ones are:

• Exclusivity (the no-shop): you agree not to talk to other buyers for a set period, commonly around 90 days on the company side.
• Confidentiality: both sides keep the discussions, and each other’s information, confidential.
• Costs and conduct: often who bears their own costs, how the parties will behave during the process, and the governing law and dispute forum.

Good term sheets say this explicitly, with a line noting which clauses are binding and which are not. If yours does not, that is the first thing to fix. Before you sign anything, get a lawyer to mark up exactly which obligations bite immediately, because those are the ones you are truly committing to on signing.

02Price and Structure

The headline number is what everyone reads first, but the term sheet says more than a single figure. It sets out the price and how that price is paid, and the two together decide what actually lands in your bank account.

Watch for how the consideration is split:

• Cash: the cleanest form, paid at closing (less any amount held back in escrow).
• Stock: shares in the buyer instead of cash. This ties your outcome to the buyer’s future and may carry its own lock-in.
• Earn-out: part of the price paid later, only if the business hits agreed targets after the deal. We cover this in section 6, because it is where a lot of value quietly disappears.

The term sheet also flags the structure of the deal: is the buyer purchasing the shares from the shareholders (a share sale), or buying the business and assets from the company (an asset or slump sale)? The two have very different tax outcomes for you, so this line matters as much as the price. We unpack the trade-offs in deal structures: share sale vs asset sale.

One honest warning: the price on the term sheet can and often does change during diligence. If the buyer finds a problem in the numbers, the contracts, or the tax position, they will use it to renegotiate down. That is normal, and it is exactly why being genuinely ready for diligence protects your price. How buyers arrive at the number in the first place is its own subject, covered in how startups are valued at exit.

03Exclusivity / No-Shop

The exclusivity clause, also called the no-shop, is the one binding clause that costs you the most if you get it wrong. It says that for a fixed period you will not solicit, negotiate with, or entertain offers from any other buyer. In effect, you take yourself off the market and give this one buyer a clear run.

That is a fair ask from a buyer who is about to spend real money on diligence, but it is a real concession from you. While the clock runs, you have no leverage and no alternative. If the buyer slows down, keeps asking for extensions, or chips at the price, you cannot simply turn to another bidder.

So keep exclusivity tight:

• Length: aim for a defined window, commonly around 90 days, not open-ended and not casually extendable.
• Milestones: tie the period to progress, for example diligence completed by a date, a draft definitive agreement by another, so a stalled buyer cannot just sit on your exclusivity.
• Exit rights: reserve the right to walk away if the buyer misses milestones or materially changes the deal.

04Reps & Warranties and Indemnity

The term sheet will flag, and the definitive Share Purchase Agreement (SPA) will spell out in detail, the reps & warranties (representations and warranties). These are the factual promises you make about the company: that the accounts are true and complete, that taxes and statutory dues are paid, that the material contracts are valid, that you own your intellectual property, that there is no undisclosed litigation, and a long list of similar statements.

They matter because they are promises with teeth. If a warranty turns out to be untrue and the buyer suffers a loss as a result, the indemnity provisions let them claim money back from you, the seller. In plain terms: the more you promise, the more exposure you carry.

How founders protect themselves

You do not manage this by refusing to give warranties; no buyer accepts that. You manage it through:

• Honest disclosure: you set out known issues in a disclosure letter or schedule. Anything you disclose properly cannot generally be claimed against later, so disclosure is your shield. Hiding a problem is what gets founders into trouble.
• Caps and limits: negotiate a cap on total indemnity (often a percentage of the price), a floor below which small claims cannot be brought, and a time limit after which warranty claims cannot be made.
• Knowledge qualifiers: where fair, warranties are given to the best of your knowledge rather than as absolute guarantees.

The buyer confirms these facts through due diligence, so the cleaner your books and compliance, the shorter and safer your warranty list becomes. This is one of the strongest reasons to keep your house in order well before you ever get a term sheet.

05Escrow / Holdback

Even in a cash deal, you usually do not receive the full price at closing. A part of it is placed in escrow (or simply held back), which means the money sits with a neutral third party or is retained by the buyer for a set period to cover any claims that arise, mainly breaches of reps & warranties or indemnity claims.

As guidance, a common arrangement is somewhere in the region of 10 to 20 percent of the price held back for around 12 to 24 months, though the exact amount and period vary a great deal by deal, sector and how much comfort the buyer has from diligence. Please treat these ranges as illustrative and negotiate them on the facts of your deal.

The logic is simple: the holdback gives the buyer a ready pool to draw on if a warranty turns out to be false, rather than having to chase sellers who have already spent the money. If no valid claims arise during the period, the held-back amount is released to the sellers at the end.

What to negotiate here: the size of the holdback, the length of the period, whether interest accrues, and how claims are decided so that money is not held hostage over a minor or spurious claim. A smaller, shorter escrow is better for you, and a clean diligence process is your best argument for one.

06Clauses Founders Miss

These are the clauses that get skimmed because they are not the headline price, and yet they decide your money and your life after the deal. Read every one of them slowly.

Earn-out

An earn-out is part of the price paid later, contingent on the business hitting agreed targets after closing, such as revenue or profit milestones. Buyers use it to bridge a valuation gap: they pay less up front and the rest only if the business performs. It can lift your total price, but it is a frequent source of disputes, because you must now hit targets in a business you no longer fully control. Define the targets, exactly how they are measured, who controls the levers that affect them, and what happens if the buyer changes the plan. A vague earn-out is a fight waiting to happen.

Non-compete and non-solicit

Expect a non-compete (you will not start or join a competing business for a period) and a non-solicit (you will not poach employees or customers). These are normal, but check the scope, the geography and the duration. An over-broad non-compete can quietly restrict what you are allowed to do for years after you leave.

Founder lock-in and retention

Buyers frequently want the founders to stay for a defined period after the deal, tied to part of the consideration or to retention payments. This founder lock-in is fine if you plan to stay, but be clear-eyed: part of your payout may depend on you continuing to work for the acquirer on their terms.

Conditions precedent

Conditions precedent (CPs) are the things that must be satisfied before the deal actually closes: approvals, consents, clean diligence, board and shareholder sign-offs, and so on. Unmet CPs can delay or even sink a deal, so know which ones are in your control and start clearing them early.

Confidentiality

Finally, check how long confidentiality survives and what it covers. It binds you from signing, it usually outlives the term sheet whether or not the deal happens, and it governs what you can say about the process and the other side.

07Frequently Asked Questions