Updated June 23, 2025
Jay Jung | Founder & Principal
When it comes to M&A deals, it’s always the big headline valuations that make the news. What they don’t show is that those wins are often decided in two lesser-known stages of the process: the term sheet and the Letter of Intent (LOI). While these documents look similar at first glance, they serve distinct purposes. Learning to distinguish key term sheet vs LOI functions helps you use each document effectively, which is essential for protecting your negotiating position. When handled properly, a solid term sheet and LOI can save you months of work and add millions of dollars to your exit.
The Term Sheet: What Is It, and Why Does It Matter?
While there may be multiple ways to define “term sheet,” this phrase typically describes a plain-language list of the most crucial deal terms. It gives both sides a quick way to judge whether they are in the same ballpark before investing in deeper due diligence or legal drafting.
Typical elements of a term sheet include:
- Headline Valuation Range: The total value of the company and capital to be deployed.
- High Level Structure: amount of cash at close, and type of deferred compensation, e.g., rolled equity, earn-out, seller’s note
- Management Expectations: Post-transaction roles and compensation for sellers or key team members.
- Transaction Logistics: Due diligence scope and timeline, and allocation of deal expenses.
- Exclusivity: Exclusivity period and extension terms
The term sheet is a useful tool to quickly gauge whether the buyer and seller are in the same ballpark. A signed term sheet can be used as a framework for the LOI and, ultimately, the purchase agreement. Although largely non-binding, it anchors expectations, sets valuation parameters, and establishes critical deal mechanisms while leverage is still balanced. With that outline in place, the next step is the LOI, where a number of these bullet points transition into binding or partially binding obligations.
LOI vs Term Sheet: Core Differences
Although both documents frame the structure of a deal, an LOI formalizes many of the elements listed in the term sheet. Written in the form of a letter, an LOI will translate bullet points into narrative clauses that your legal team can drop straight into the definitive agreement.
What is an LOI?
While most of an LOI remains non-binding, three provisions almost always turn into enforceable commitments:
- Exclusivity, which gives the buyer a 45 to 120-day window where you’re not allowed to shop the deal elsewhere.
- Confidentiality, which keeps financials, customer, employee and any other sensitive data out of the public view and away from competitors.
- Expense or Break-up Fees, which determine who pays for legal and diligence costs if the deal falls apart.
These clauses shift leverage toward the buyer, so negotiate them with the same level of focus you would any other deal-critical term. Focus on capping the buyer’s “reasonable expenses”, keeping the exclusivity window as tight as possible, and including confidentiality language that fully protects your proprietary information.
When to Start Negotiating an LOI
Negotiating LOI terms begins the moment potential buyers or investors learn your company is open to a deal. Once this happens, the best way to keep the upper hand is to create competitive tension. You can enhance your negotiating power by:
- Prioritizing must-haves. Form a view on which terms are non-negotiable before you receive the LOI.
- Having a negotiation buffer. When the owner / principal directly negotiates they lose significant negotiation flexibility.
- Seeking verbal alignment first. Use video or in-person meetings to walk through issues before sending a revised draft of your LOI. That way, you can avoid trading endless redlines.
- Inviting several bidders. Even two qualified buyers can add meaningful pressure.
- Creating a bid matrix. Bids are not always apples-to-apples. A comparison matrix helps frame the trade-offs between headline valuation, escrows, earn-outs, transition periods, and any unusual terms side-by-side.
Once you’ve confirmed verbal alignment and captured it on paper, you’re ready to press for a signed LOI.
What Makes an LOI Effective?
An effective LOI does two things: it provides abundant clarity to key deal terms and thereby enhances probability of close. Allows for a faster path to transaction close post-LOI signing. Stress-test every draft by checking key points like:
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Hash these points out directly with buyers. If you spot a gap, such as a lower valuation or an aggressive escrow structure, bridge it with performance-based earn-outs or equity rollovers instead of conceding on price. It’s important to resolve these issues, but make sure to avoid getting bogged down for too long. A slow LOI process often leads to drawn-out diligence.
Common Negotiation Traps and How to Avoid Them
Even seasoned executives can overlook a minor clause that erodes value and weakens their bargaining position. Before you sign your LOI, make sure your draft doesn’t fall prey to any of the following negotiation traps.
Price Tunnel Vision
A lofty multiple can shrink fast if it’s paired with a large escrow holdback or a punitive earn-out schedule. Build a net proceeds model that shows actual cash at close and every milestone, then negotiate escrow caps, phased earn-out structures, or faster release schedules to keep the real payout aligned with the headline number.
Premature Exclusivity
Sellers lose 90% of their negotiating power when they sign exclusivity. Granting an exclusivity window before headline economics and core structure terms are locked in gives the buyer a decisive advantage. Push exclusivity to the very end of negotiations, or make it conditional. For example, you can establish a 30-exclusivity period that only extends with mutually agreed written consent.
Value of Rolled Equity
When a deal includes rolled equity, the headline value can be misleading. Sellers must scrutinize the terms of their new stock, including the issuance price per share, its calculation method, the specific share class, and how that class’s rights are impacted by others. Without a clear understanding of these factors, sellers risk receiving overpriced equity that limits potential upside. Because this rolled equity can become the seller’s largest single investment, it deserves a proportional level of due diligence.
Undefined Break-up Fees
Vague phrases like “reasonable expenses” invite ballooning legal bills if the deal falls apart. Cap the reimbursement dollar amount up front or state that each side pays its own way unless the other party breaches the LOI’s binding provisions.
Open-Ended Earn-Out Metrics
Earn-out milestones tied to “industry standard” KPIs or ill-defined EBITDA adjustments let a buyer move the goalposts later. Nail down exact measurement methods, accounting policies, and dispute-resolution mechanics. Make sure to require quarterly reporting so you can track progress in real time. Many sellers don’t operate under full GAAP accounting. So while it may seem benign to say that the earn-out EBITDA will be based on GAAP, this could end creating a significant hurdle to achieving the earn-out metric.
Rolling Diligence Scope Creep
Every supplemental request feels minor at the time, but weeks of added data pulls stretch timelines and chip away at momentum. Set a diligence cutoff date in the LOI, require that all follow-up requests be material to closing, and build a mechanism (e.g., written consent for extension of exclusivity) to discourage endless scope changes. If any clause fails the sniff test, fix it immediately. That means asking for clarification, negotiating the wording, or in some cases, striking the clause altogether. Again, you want to keep the process moving. Your term sheet, alignment call, and signed LOI should wrap up in under three weeks. Once you push past this, fatigue will set in. By week six, valuations may start to drift, and competitive buyers could decide to look elsewhere.
Who Handles Term Sheet and LOI Negotiations?
Most successful negotiations are handled by a professional M&A advisory firm. While founders and CEOs are experts at handling day-to-day business operations, M&A transactions are likely something they only deal with a few times in their careers. A dedicated advisory team oversees multiple transactions each year, building specific expertise in drafting, redlining, and negotiating term sheets and LOIs. They understand how to pressure-test each clause, counter unfavorable language, and keep competitive tension high until a definitive agreement is signed. Most importantly, they keep emotions, the number one killer of deals, out of the equation.
Companies that try to negotiate on their own often leave money on the table. While a weak term sheet or LOI may not kill a deal outright, it can lead to undervaluation, higher risk a re-trade, and an exhausting prolonged diligence period. A professionally crafted LOI can help you avoid these issues, accelerate diligence, and stay in control of the process until the deal is signed.
Takeaway
While term sheets and LOIs both frame the deal, each document serves its own purpose. The term sheet is a concise, non-binding outline that aligns the buyside and sellside on valuation, structure, and key protections before deep diligence begins. The LOI builds on that framework, solidifying many of those points into clearer legal language and adding binding or partially binding clauses like exclusivity, confidentiality, and expense allocation.
Because deal terms seldom improve after the LOI, it’s important to negotiate both documents rigorously, create competitive tension, and seek the help of an experienced advisory team. When handled correctly, a strong term sheet and LOI can limit surprises, shorten timelines, and maximize value at closing.
Need term sheet and LOI negotiations to go smoothly? Get the expertise you need now with Embarc Advisors.
Term Sheet vs LOI Frequently Asked Questions (FAQs)
Is LOI the Same as Term Sheet?
A Letter of Intent (LOI) is not the same as a term sheet. Although both outline a proposed deal, a term sheet typically contains a bullet-point overview of proposed terms and is largely focused on the economics of a transaction. An LOI converts those points into paragraph form, often including binding or partially binding clauses pertaining to exclusivity and confidentiality, while also delving into more detail on legal points and the diligence process.
Which Comes First, LOI or Term Sheet?
In most M&A deals, the term sheet will come first. It aligns both sides on headline valuation, structure, and key protections before anyone spends heavily on diligence or legal work. Once those basics are nailed down, the buyer drafts an LOI that moves the deal into final diligence and definitive agreements.
What is an Indication of Interest (IOI)?
An Indication of Interest (IOI) is a preliminary document submitted by a potential buyer that precedes a Letter of Intent (LOI). While similar to an LOI, the terms of an IOI are often intentionally non-specific and subject to change as due diligence progresses. For example, the valuation may be presented as a range, and the consideration mix (cash at close vs. rolled equity) may be proposed using approximate figures. While some IOIs may include exclusivity clauses, it is in the seller’s best interest to gain clarity on the specific valuation and any core terms before committing to exclusivity.
What is the Difference Between a Term Sheet and an Agreement?
A term sheet is non-binding guidance that creates a framework for negotiations. A definitive agreement is a fully negotiated, legally binding contract drafted by attorneys. By signing a definitive agreement, you make a commitment to close on the stated terms, subject only to the closing conditions it defines.
