[This sample term sheet sets out illustrative terms for an acquisition of a business. The sample term sheet can be adapted for situations involving a stock purchase, asset purchase or purchase of a segment, business line or subsidiary of a larger business.]
Business Acquisition Term Sheet
1. Transaction Structure; Purchase Price.
1.1 Seller Business. The Seller businesses to be included in the Transaction would consist of all [DESCRIBE MAIN BUSINESS CONTEMPLATED FOR ACQUISITION] and other businesses conducted by Seller and its affiliates.
1.2 Structure. Buyer will acquire in the transaction a 100% interest in the Seller business. We will explore with you mutually beneficial tax-efficient structures for the Transaction in connection with our due diligence investigation.
1.3 Target Purchase Price. The Target Purchase Price for substantially all of the assets of Seller is approximately $[DOLLAR AMOUNT], plus the value of a [TIME PERIOD] earn-out described below with a potential value (based on the Seller financial projections) of up to $[DOLLAR AMOUNT]. The Target Purchase Price reflects a valuation for the Seller business based on a projected baseline Adjusted EBITDA of $[DOLLAR AMOUNT] and is subject to due diligence and adjustments discussed below. This proposed purchase price is subject to completion of our due diligence review and assumes that at closing Seller: (i) would be debt-free; (ii) would not have any liabilities outside the ordinary course; and (iii) would have a level of working capital and cash to be agreed in the definitive documentation, but that would be sufficient to support operations of Seller for at least [NUMBER] days after closing.
1.4 Payments to the Seller Stockholder. Subject to the escrow arrangements described below, the purchase price would be paid in cash % at closing, % on the one-year anniversary of closing and the balance on the 24-month anniversary of closing. Earn out payments would be paid as described below.
1.5 Earn-Out Payment. The Seller will be eligible to receive earn-out payments based on the performance of the Seller business for calendar year [YEAR] and calendar year [YEAR]. The aggregate earn-out payments would not exceed $[DOLLAR AMOUNT]. Earn-out payments will be based on calendar year [YEAR] and calendar year [YEAR] pro-forma EBITDA of the Seller business as a standalone entity. The calendar year [YEAR] and calendar year [YEAR] Pro-forma EBITDA (annualized) will be multiplied by a valuation multiple of [NUMBER]x to obtain the calendar year [YEAR] and calendar year [YEAR] Pro-forma Enterprise Value of the Seller business. The earn-out payment paid with respect to calendar year [YEAR] will be equal to [PERCENTAGE]% of the amount by which the calendar year [YEAR] Pro-forma Enterprise Value of the Seller business exceeds $[NUMBER].
2. Definitive Agreements.
2.1 Transaction Agreement. Subject to satisfactory due diligence review of the Seller business, Buyer expects the definitive agreements for the Transaction to contain customary covenants, representations and warranties of the Seller stockholders for transactions of this type; including, but not limited to representations and warranties regarding capital structure, title to and condition of capital stock (if any) included in the Transaction, authorization, corporate organization, ownership of assets, no conflict, consents, financial statements, undisclosed liabilities, compliance with laws, litigation, material contracts, employees, employee benefits and labor relations, environmental matters, intellectual property, customers, insurance, brokers, liens and taxes. The applicable survival period for all representations and warranties would survive until [NUMBER] days after the end of the applicable statute of limitations. The Transaction agreement will also contain provisions to appropriately adjust the purchase price to the extent (a) of debt/or cash (if different from agreed amounts) in Seller at closing, and (b) working capital is less than or greater than an agreed target. The initial draft of all Transaction documents will be prepared by Buyer counsel.
2.2 Indemnification. After closing Buyer expects the Seller stockholder to indemnify Buyer and its affiliates from breaches of representations, warranties and covenants contained in the definitive transaction documents on reasonably customary terms, and that the maximum amount of such indemnification for breaches of operational representations and warranties would be [PERCENTAGE]% of the aggregate purchase price.
2.3 Escrow. In order to ensure that funds are readily available to Buyer to satisfy any indemnification claims following the closing of the Transaction, Buyer will require that % of the aggregate purchase price be held in escrow until the second anniversary of the closing.
2.4 Non-Competition and Non-Solicitation. Buyer will require from the Seller stockholders non-competition and customer and employee non-solicitation covenants in the definitive agreements with such covenants to be limited to the business of Seller as conducted, previously conducted or contemplated to be conducted at the date of the definitive agreements, or contemplated to be conducted by Buyer and disclosed to the Seller stockholders through such date. The non-compete and non-solicitation covenants will extend for [1-5] years post closing.
3.1 Employees. After closing Buyer anticipates that substantially all employees and management presently employed by Seller will continue such employment on terms and conditions generally in line with industry standards, including without limitation, non-compete and non-solicitation undertakings.
3.2 Employment Agreements. As a condition to consummation of the Transaction, Buyer will require certain employees and management of Seller (including the Chief Executive Officer) to execute employment agreements (containing non-compete and employee and customer non-solicitation provisions), as Buyer may deem appropriate. The employment agreement with the Chief Executive Officer would be for an initial term of [NUMBER RANGE] months. The terms of these employment agreements will otherwise be subject to discussions with the individuals involved.
Buyer expects to finance the Transaction through equity provided by [_________] and his equity partners and debt financing from its lender relationships. We have conducted initial discussions with our equity partners and bankers concerning the Transaction and are highly confident of our ability to finance the Transaction.
5. Due Diligence.
Prior to proceeding with the Transaction, Buyer and its partners must conduct and be satisfied with the results of a complete business, legal and financial (including tax) due diligence review of Seller’s business and operations. The due diligence review will include a confirmatory due diligence investigation of Seller EBITDA for calendar year [YEAR].
Buyer has retained counsel and accountants for the Transaction, and is prepared to devote considerable resources to the next phase of the transaction process. Given the experience and depth of our team, and assuming cooperation from Seller and its advisors, Buyer believes that it could complete due diligence and simultaneously negotiate the definitive agreements within 45 days of execution of the Letter of Intent to which this Term Sheet is attached and close as soon thereafter as practicable.
7. Conditions to Closing.
Without limitation to the other provisions of this Term Sheet, consummation of the Transaction is subject to: (i) satisfactory completion of due diligence; (ii) obtaining any reasonably required third party or governmental consents or approvals to the Transaction; (iii) the negotiation and execution of Transaction documentation on terms satisfactory to all relevant parties; (iv) Seller continuing to conduct its business in the ordinary course; and (v) the absence of any material adverse change in Seller’s business.
In consideration of the substantial commitment of resources that the Transaction will entail, the Seller stockholders hereby grant Buyer a 45-day exclusivity period in which to finalize the Transaction terms and execute the definitive agreements, with such period commencing on the date of execution of this Term Sheet. Such period shall be extended by a further 30 days following the initial 45-day term if at that time the Transaction is progressing well and is reasonably likely to close. During the exclusivity period, the Seller stockholders will not (and will not cause or permit Seller or any of their or Seller’s employees, officers, directors, stockholders, representatives or advisors to): (i) solicit, initiate, or encourage the submission of any proposal or offer from any person or entity (other than Buyer) relating to an Acquisition Transaction (as hereafter defined); or (ii) participate in any discussions or negotiations regarding, furnish any information with respect to, assist or participate in, or facilitate in any other manner any effort or attempt by any person or entity to engage in or seek an Acquisition Transaction. “Acquisition Transaction” means any of the following involving Seller (or any other entity holding any asset used in the Seller business) or any of its businesses: (a) any merger, consolidation, share exchange, acquisition, business combination or other similar transaction; or (b) any sale, lease, exchange, transfer or other disposition of any of the assets of Seller or any of its businesses (other than in the normal course of business consistent with past practice) or any shares of the capital stock or ownership interest in any entity holding any assets used in Seller or any of its businesses in a single transaction or series of transactions.
Each party is to bear its own legal fees and expenses in connection with this transaction.
The parties each acknowledge and agree that the terms and conditions contained herein, all non-public due diligence and financial materials provided to the other party in connection herewith, and the ensuing negotiations (including any discussions or negotiations that have occurred or are ongoing), will remain confidential between the parties, and no non-public information regarding the foregoing will be distributed to any entity or person, except any employees, contractors, potential sources of equity or financing, agents or advisors of a party who have a need to know the same in order for such party to proceed with or evaluate the Transaction, or as otherwise required by applicable law.
11. Governing Law.
This Term Sheet and any definitive agreements which may be executed in connection herewith shall be construed and governed in accordance with the laws of the State of [STATE], without regard to its laws regarding conflicts of law.
Except for Sections 8, 10 and 11 of this Term Sheet regarding exclusivity, confidentiality and governing law, respectively, this Term Sheet is non-binding and is intended solely as a summary of the principal terms currently proposed by the parties. The parties acknowledge that their execution and delivery of this Term Sheet does not create any obligation on the part of any party to negotiate (in good faith or otherwise) any definitive agreement with respect to the transactions described herein. At any time prior to the execution of a binding definitive agreement, either party may, at any time, propose terms that are different than those discussed in this Term Sheet or unilaterally terminate all further discussions and negotiations regarding the transactions contemplated herein without any liability whatsoever.