Term sheet

A term sheet is usually not legally binding in its entirety, aside from provisions the parties specifically agree should bind them, such as confidentiality or an exclusivity period. Its real function is practical: it lets a buyer and a lender agree on the shape of the deal before either side spends significant time and legal cost drafting the full loan documents.

What is worth negotiating at this stage

• Financial covenants and how often they will be tested, and whether a cure period applies before a breach becomes a default
• What counts as collateral, and whether security is limited to the assets being acquired or extends further
• Prepayment terms, including whether a vendor take-back can be repaid early without penalty
• Conditions the lender will require before funding, which become the checklist for the commitment letter that follows

Why leverage shifts after it is signed

Once a term sheet is agreed and the buyer has committed time, legal fees and momentum to the deal, a lender generally has more leverage in any later negotiation than it did at the term sheet stage, when it was still competing for the business. Terms not raised while the term sheet is being negotiated are often much harder to change once full documentation is underway.

How it differs from a commitment letter

A term sheet is generally an earlier, more negotiable indication of terms, while a commitment letter is the lender’s firmer written commitment once its own diligence has progressed further. Not every lender uses both documents, and some combine the two — confirming which stage a particular document actually represents avoids treating a preliminary term sheet as though financing were already secured.