Are term sheets worthwhile?

There’s always been a debate whether term sheets, heads of agreement, memoranda of understandings and the like are worthwhile. Some say they gloss over difficult issues and lengthen the time it takes to bring a deal to closure.

I say that a well drafted term sheet is worth its weight in gold.

A good term sheet should:

• clearly summarise the key terms, leaving out boilerplate and terms which the parties’ legal teams should have no difficulty agreeing in the definitive documentation
  
  
• be part of a thorough and comprehensive transaction risk-benefit analysis
  
  
• enable the parties to optimise risk allocation between the parties
  
  
• help the parties to identify and focus management’s time and attention on the core business elements of the deal without those core elements being lost in legalese
  
  
• reduce the management time required to bring the deal to closing
  
  
• help the parties’ management teams to assure there is a common benefit in pursuing the deal or, if there is not, to bring the negotiations to an early end with minimum recriminations
  
  
• reduce the overall transaction costs of the deal
  
  
• streamline and accelerate the process of producing the definitive transaction documentation.

Opinions differ over whether to bring in lawyers at the term sheet stage. I recommend bringing in a lawyer at an early stage. Being a practising lawyer, some might say “he would say that wouldn’t he”, but an experienced lawyer can help the parties to focus on key issues, advise on optimising risk allocation, suggest solutions and compromise positions and help ensure the term sheet delivers the benefits outlined above and thereby smooth the path to deal closing.

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