[EP 272] Jargon Buster: Understanding Term Sheets, MOUs, and More

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Intro [00:00:00]:

Ladies and gentlemen, good evening. Are you ready? Okay, here we go. You’re listening to the Deal Room podcast. Join us as we bring you the inside scoop on business, sales and acquisitions, get across trends in the area, and hear the industry’s best recount their real life tips, traps, and experiences. Now here’s your host, Joanna Okie.

Joanna Oakey [00:00:24]:

Hello, hello and welcome back to the Deal Room Podcast, a podcast proudly brought to you by our commercial legal practice Aspect Legal. Now, in this episode, we revisit one of our most popular Deal Room podcast episodes. This particular one has repeatedly hit our monthly top ten and has received the most feedback out of nearly all of our podcasts. I think the reason probably is because terminology, particularly in the realm of business sales and acquisitions, is such a confusing area. So the good news is we’re here with some help again. So get ready for our rewind to episode 159, covering term sheets, MOUs, LOIs, and more. What’s the difference, what’s binding and what you should be looking out for? Buckle in – here we go!

Joanna Oakey [00:01:28]:

Hi, it’s Joanna Oakey here, and welcome back to the Deal Room Podcast, a podcast proudly brought to you by our commercial legal practice Aspect Legal. Now, today is a really short episode where I just want to, in very high level cover off something that has come across my desk a few times in the last few weeks. And so I wanted to clear up a bit of confusion. It’s what on earth is the difference between all of these names that we give to the document that documents the high level commercial terms between the parties? So what terminology have I heard use? There’s so many different sales, we can call them the commercial terms, a terms sheet, an MoU, and that means Memorandum of Understanding, an LOI, that means letter of intent, or an NBIO. So a non-binding indicative offer. So all of these are words, and certainly I’ve probably heard more, and I can’t think of them right at this moment, but these are all terminology to describe essentially the same thing. And that is the high level document that sits between the parties, the buyer, and the seller to set out the high level commercial terms in relation to the deal that has been agreed.

Joanna Oakey [00:02:48]:

Now, I’ll record another podcast, just giving you a snapshot of timeline and where everything sits in the order. But just as a quick overview, generally, this terms sheet, as I’ll call it, but you might be calling it something else. This terms sheet generally records that general agreement between the parties in relation to the high level terms and sits then, before due diligence, quite often. So quite often, due diligence will happen after the term sheet, and then the contracts will be prepared in parallel. But timelines can be different depending on the transaction. Sometimes contracts won’t begin to be negotiated until after due diligence, and sometimes, if timing is important and in general circumstances, we’ll be starting the negotiation of the contracts in parallel to due diligence being undertaken. But today we’re just talking really just about this terms sheet document. So another question that I’m often asked is, are terms sheets binding? And the answer to this is, well, it depends.

Joanna Oakey [00:03:58]:

It depends on what the parties want. So, generally speaking, term sheets aren’t binding. The general idea of them is that you will set out in them the prices that has been agreed between the parties, the parties themselves, what it is that’s being sold. So is it a business sale or a share sale, and then the structure of the deal. So that might mean that the purchase price is paid in various ways. It might be setting out earnouts or the terms of deferred payments. If there’s deferred payments, you might include security, or you might leave discussions of security until the negotiation of the purchase contract. And one other thing that might be a consideration for inclusion in the terms sheet, particularly if you’re coming in from and acquirer perspective, the buyer perspective is whether or not you’re going to include an exclusivity period into the terms sheets.

Joanna Oakey [00:04:55]:

Now, this is where elements might be taken to be binding. So if we as a buyer, want to bind the seller into an exclusivity period, so that we can be assured that during the period that we’re spending money on getting due diligence done, we are protected that the seller is not shopping the business around to another potential buyer. We can add an exclusivity period in, and the exclusivity period might simply be the period of the due diligence, or it might be a longer period, depending on what’s appropriate between the parties and in the transaction itself. And so that exclusivity period is generally a component of the terms sheet that is binding, whereas generally other components of the term sheets are not binding other than perhaps the confidentiality provisions. But you usually find that there’s a nondisclosure agreement that’s separate to the term sheet that has also been signed by the parties, which deals to a greater degree with confidentiality. But generally, confidentiality is also another component of the term sheet that will be included, and that element will generally have a binding nature to it. But other than that, generally term sheets are not binding in some instances they might be, but the reason that the rest of the term sheet in relation to the purchase and the price is not binding is that your sale contract contains so many extra details that won’t be included in this term sheet. So that is the warranties that go together with the business detail about conditions, precedent and things that have to happen before entering into a binding contract itself within the contract.

Joanna Oakey [00:06:40]:

That this is far too much detail for the term sheet. And what you’re trying to do with a term sheet is keep it as simple as possible, but as detailed as it needs to be to protect where both of the parties are at in the transaction. So even though it’s a simple document, there’s quite a few things to think about when you’re looking at using a term sheet. So just as a recap of the things that we’ve covered today, therE’s lots of different names for a term sheet, commercial terms, terms of agreement, heads of agreement, Mou LoI NBiO, or just term sheet. But it really doesn’t matter what heading you use. The thing that matters is the way it is set out and the allocation to the elements that will be binding and not binding from a legal perspective. The second component is you need to be aware that even though these documents are short, there still is sometimes a bit of thought that needs to go into what should be in the documents. So this is the time that you should absolutely be ensuring that you have adequate legal advice to ensure that you have the right kind of term sheet that you’re using that is appropriate for the transaction where you sit in the transaction.

Joanna Oakey [00:08:01]:

So I hope that’s been a useful overview for you. I know it’s been a short, sharp one, and if you’d like to talk more about the specifics of templates that you are using, if you’re an advisor or a broker in this space, or indeed if you’d like advice, if you’re a buyer or seller, then simply head over to our [email protected] au, and click the free call button and you’ll be able to set up a time with one of our legal legals to discuss how we can assist you in working with your Terms Sheets documents.

Joanna Oakey [00:08:39]:

Well, that’s it for this episode of The Dealroom Podcast. We hope you’re now primed for your next deal with these pointers and have enjoyed these fascinating insights.

Joanna Oakey [00:08:49]:

Now, if you’d like more information about this topic, then head over to our website thedealroompodcast.com, where you’ll be able to download a transcript of this episode, as well as access any contact details and any other additional information we referred to in today’s podcast. Now, if you’d like to get in contact with our guests today and the services they offer, you can go ahead and check out our show notes for a link right through to them and their details. You can also book in directly with our legal legals at Aspect Legal. If you’d like to soundboard your next steps, discuss a legal question, or find out more how we can assist, whether that’s with buying or selling a business, or perhaps somewhere in between. Now don’t forget to subscribe to The Deal Room Podcast on your favorite podcast player to get notifications whenever a new episode is out. 

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You’ve been listening to Joanna Oakey and The Deal Room Podcast, a podcast proudly brought to you by our commercial legal practice, Aspect Legal. See you next time!

Outro [00:10:17]:

Aspect Legal has a number of great services that help businesses prepare for a sale or acquisition, to help them prepare in advance, and to get transaction ready. We’ve also got a range of services to help guide businesses through the sale and acquisitions process. We work with clients both big and small and have different types of services depending on size and complexity. We provide a free consultation to discuss your proposed sale or acquisitions, so see our show notes on how to book a time to speak with us or head over to our website at aspectlegal.com. au. 

Outro [00:10:58]:

Ladies and gentlemen, that will conclude this evening’s entertainment. Thanks for listening to The Deal Room podcast. To find out more about this episode and other episodes in the series, check out the show notes or head over to our website at thedealroompodcast.com.au.