The term sheet — not the SPA — is where the economics, structure, and risk allocation of an M&A transaction are set. By the time the SPA arrives, the architecture is fixed.
What the Term Sheet Sets
A well-drafted M&A term sheet locks in the price and price mechanism (fixed, working-capital-adjusted, locked-box, completion accounts), the consideration structure (cash, stock, earn-outs), the conditions to closing, exclusivity terms, escrow and indemnity architecture, governance, and post-closing arrangements.
Everything that follows in the SPA is the legal documentation of what the term sheet decided. Material economic levers re-opened in SPA negotiation are the exception, not the rule.
Where Negotiating Power Sits
Before exclusivity, the seller has competitive tension. Multiple bidders create real price pressure. Buyers know this and push for early exclusivity, often signalled by 'best and final' language combined with binding term-sheet structures.
After exclusivity, the seller's leverage drops sharply. Material adverse changes in price or structure during exclusivity are uncomfortable and often costly to the seller — re-opening competition is not free, takes time, and signals problems.
The key strategic decision is when to grant exclusivity and on what terms. Granting it too early gives away the auction premium. Granting it too late risks losing the buyer to deal fatigue.
What Negotiating the Term Sheet Looks Like
Pricing mechanism: locked-box (fixed price as of a reference date) versus completion accounts (price adjusted to closing) — different risks, different incentive structures.
Earn-out architecture: which metrics, what time period, what guardrails to prevent post-closing manipulation. Earn-outs are a place where deals are often priced badly because the contingent component is mis-modelled.
Reps and warranties: scope, caps, baskets, survival periods, W&I insurance.
Conditions to closing: regulatory, financing, MAC, third-party consents — and how each shifts risk.
Each of these can change the actual economics of the deal by single-digit to mid-double-digit percentages of consideration. Negotiating the term sheet is where the deal is built.