You Wouldn’t Build a Building Without a Blueprint: Don’t Draft an Agreement Without a Term Sheet

The Term Sheet Explained

Perhaps you’re selling a business, entering into a joint venture, making a significant hire, or starting a company. When such significant or complex transactions arise, you probably already know that you’ve got to hire a trusted advisor to assist you. This is just the first step. Your hired attorney must also assist you with drafting a term sheet for your agreement.

A term sheet is the blueprint of a legal contract. It outlines a deal’s primary terms and conditions as a foundation for a comprehensive and definitive legal contract that will govern your transaction, assuming you and your counterparty sign it. The term sheet is also referred to as a letter of intent. In the context of buying a company or an M&A transaction, it serves as the first substantive document laying out both parties’ basic understanding of the terms.

Having a term sheet is imperative for all significant or complex transactions. If you cannot agree on a term sheet, you’d be wasting your time and money trying to do the deal.

Legal Expertise Is Intangible But Essential

Legal expertise — the astute negotiation, meticulous drafting of contracts, and comprehensive legal protection — often lacks tangible manifestation. However, this doesn’t mean its value should be underappreciated.

Think of it this way: the acquisition of any asset is not just about the physical item itself. It also includes the safety and protection encapsulated within the legal documents that facilitated its purchase. The ability to craft such contracts is a product of intellectual rigor and expertise, both of which are just as essential to your business as the assets they help secure.

These intangible qualities may not be ‘touchable’ like a new piece of machinery, but they are the invisible shield that protects your investment. Cutting corners on legal expertise is akin to ‘cutting into the bone.’ It risks the very core of your business operations, possibly leading to complications that could have been avoided with proper legal guidance. So, while the work of attorneys might be less tangible, their impact and value are profound and fundamental to the stability and prosperity of your business.

Building With(out) a Blueprint

Imagine you’re getting ready to break ground on a new corporate headquarters on land you purchased a few years ago. You’re interviewing a potential builder, and the builder asks for the blueprints.

What do you think will happen if you pull out a napkin with a drawing you made with crayons and tell the builder to use it as the blueprint?

Making an important or challenging transaction without a term sheet is just the same. Its impact may seem less tangible at face value, but it is a legal blueprint that’s just as crucial to the future of your business.

We think you’ll also like:

1. Reading and Writing a Letter of Intent
2. Understand Buy-Sell Agreements: Safeguard Your Business Against Death, Disability, Divorce, and Disputes
3. Assembling the Right Transaction Team: Tips for Selling Your Company Successfully

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. M&A Boot Camp: Key Provisions in M&A Agreements
2. How To Sell A Business A Step By Step Guide
3. Business Law Review: Selling a Business-101

This article was originally published on July 27, 2023. This article was most recently updated by the Financial Poise Editors.]

©2025. DailyDAC^TM, LLC d/b/a/ Financial Poise^TM. This article is subject to the disclaimers found here.