Financial Poise
You Wouldn’t Build a Building Without a Blueprint

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

You own or help run a privately owned company. You want to keep overhead as reasonably low as possible to maximize net income.

[Editors’ Note: If you don’t know the exact difference between gross income and net income, read Know Thy Numbers Installment #2 – Accounting Principles in a Nutshell]

But you shouldn’t cut into the bone. That is, you shouldn’t make budget cuts that are so deep that they harm your company’s ability to function properly. If you do that, you’ll likely have a revenue problem soon enough (not to mention many other problems, depending on what you cut).

The value of a building or a piece of equipment is manifested in concrete, physical terms. Hell, sometimes they’re made of concrete. Wrapping your head around paying significant money for something you can walk in or touch may be easier than paying for something cannot even see.

Oh, The Irony

There’s real potential for irony here: you may be far more willing to pay fair value for a building or equipment, or an add-on acquisition for that matter, than you are for the legal work necessary to do it ‘right.’

Legal expertise – the astute negotiation, meticulous drafting of contracts, and comprehensive legal protection – often doesn’t have a tangible manifestation. But 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 but 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, which are as essential to your business as the assets they help secure.

They 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, its impact and value are profound and fundamental to the stability and prosperity of your business.

Don’t be Myopic

Don’t be myopic: my example above involves a purchase, but the concept applies to any significant or complex transaction: you might be selling a business, entering into a joint venture, making a significant hire, or starting a company (to name just a few examples).

And I’m not talking about hiring an attorney. I’m assuming you’re smart enough to know that you’ve got to use one for significant or complex transactions. And I’m not touching on how to hire one. [Editors’ Note: For some tips in this regard, read Is It Worth It to Hire an Advisor?—Why Only a Trusted Advisor Will Do]

I’m talking about the title of this article.

The Term Sheet/Blueprint Analogy

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. If you cannot agree on a term sheet, you’d be wasting your time and money trying to do the deal. Are there exceptions to this rule of thumb? No, not really, because of my caveat:  remember, I’m talking about significant or complex transactions.

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 you want her to use it as the blueprint?

[Editors’ Note: Read Letter of Intent: The First Step Toward Purchase to learn more about term sheets. Term sheets and letters of intent are two terms that mean essentially the same thing, as you will see in the article. And while the article is about term sheets in the context of buying a company, you’ll easily see how term sheets are generally, regardless of what the transaction will be about.]

We think you’ll also like:

  1. Purchase Agreement Essentials – Boilerplate Provisions Terminology
  2. How to Anticipate Contract Disputes Before You Sign (And Why You’ll Be Glad You Did)
  3. What is a Buy-Sell Agreement? Protecting Your Business in Event of Death, Disability, Divorce or Disagreement
[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. The M&A Process
  2. Key Provisions in M&A Agreements
  3. Business Borrowing Basics]

©2023. DailyDACTM, LLC d/b/a/ Financial PoiseTM. This article is subject to the disclaimers found here.

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About Michele Schechter

Michele has been a director with Financial Poise since 2012. Share this page:

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