Term sheet
A term sheet is the non-binding document that precedes the LOI (Letter of Intent) and the definitive agreement. It aligns buyer and seller on the main economic terms before either party invests in formal due diligence or legal drafting. In Mexican SME M&A, the term sheet and LOI are often used interchangeably; however, the distinction matters: the term sheet is exploratory and high-level; the LOI is more structured and includes binding exclusivity and confidentiality clauses.
What does a term sheet contain?
Typical components of a term sheet include:
- Valuation base: enterprise value (EV) expressed as a multiple of normalized EBITDA.
- Consideration structure: how payment is split among tranches (cash at closing, seller note, contingent consideration).
- Exclusivity: typical period of 30–60 days in Mexican SME transactions.
- Confidentiality: binding even though the document is non-binding on economics.
- Closing conditions: due diligence, verification of assets, key accounts, etc.
- Governing law: jurisdiction that will govern interpretation and disputes.
What does a typical consideration structure look like in a term sheet?
Example with anonymized numbers from a real transaction in the water distribution sector in Mexico. EV: 9,487,643 MXN, based on 4.0× normalized EBITDA of 2,371,911 MXN (normalized from 4,941,481 MXN reported; 52% risk-weighted normalization for customer concentration, churn, transition risk, and institutional cost gap).
| Tranche | Amount (MXN) | % of EV | Timing | Conditions |
|---|---|---|---|---|
| Payment at closing | 1,423,146 | 15% | At closing | Buyer equity funding |
| Seller note | 4,743,821 | 50% | 3 years, 12% annual, equal annual payments | Prepayment allowed without penalty |
| Contingent consideration | 3,320,675 | 35% | 12 months post-closing | Top-5 stability, operational handoff, no hidden liabilities; reduction for pre-closing liabilities |
| Total EV | 9,487,643 | 100% | — | — |
Source: anonymized real transaction, distribution sector, Mexico 2024–2025. Multiples and structure reflect actual buyer underwriting, not theoretical ranges.
How do the term sheet, LOI, and definitive agreement differ?
Progression across three documents:
| Document | Nature | Role / next step |
|---|---|---|
| Term sheet | Exploratory, high-level, non-binding (except express clauses). Aligns economics before investing in the process. | Next step is the LOI. |
| LOI (Letter of Intent) | More formal; includes binding exclusivity and confidentiality, structures consideration in detail, and closing conditions. In practice it is the term sheet with legal weight on the binding clauses. | Prepares negotiation of the definitive agreement after due diligence. |
| Definitive agreement | Fully binding, negotiated after due diligence. Contains representations and warranties, closing mechanics, escrow, and indemnification. | Closes the transaction. |
In Mexican SME practice the term sheet step is often omitted and the parties go straight to LOI; omitting it increases the risk that misaligned expectations surface late in the process.
What is binding and what is not?
In a non-binding term sheet only some clauses are binding:
| Binding | Non-binding | |
|---|---|---|
| Clauses | Confidentiality; Exclusivity (if included); Governing law | Valuation; Consideration structure; Closing conditions; Representations |
A buyer that breaches exclusivity in a term sheet may face legal consequences even though the economics are not binding; jurisprudence on LOIs and term sheets recognizes that certain commitments create obligations even when the document is otherwise non-binding (see sources on Letters of Intent).
What do buyers and sellers ask about the term sheet?
- Is the term sheet the same as the LOI?
- In Mexican SME practice they are often used interchangeably, but technically the term sheet comes first and is less formal. The LOI adds binding exclusivity, confidentiality, and governing law, and structures consideration in more detail. Economic terms in both are non-binding.
- What happens if the buyer does not honor the term sheet’s exclusivity?
- Exclusivity is one of the clauses that CAN be binding even in an otherwise non-binding document. A buyer that approaches other targets or a seller that runs a parallel process during exclusivity may face legal consequences. Delaware jurisprudence (and the good-faith contractual principles of the Federal Civil Code in Mexico) recognizes obligations arising from exclusivity commitments even before a definitive agreement exists.
- Why do many Mexican SME transactions go straight to LOI without a term sheet?
- Because the process is compressed. In SME transactions with a single buyer, both sides often prefer to skip the term sheet and go straight to LOI to reduce process friction and legal cost. The risk is that misaligned expectations on valuation or structure surface at the LOI stage, which is harder and costlier to unwind than at the term sheet stage.
- Does a term sheet with detailed numbers obligate the buyer to pay that price?
- No. Valuation and consideration structure in a term sheet are non-binding. What they do is set the negotiation anchor. A buyer that arrives with a detailed normalized EBITDA bridge attached to the term sheet — as in the example transaction — signals that the valuation is already argued, not just stated. That disciplines the negotiation even though the number is not legally enforceable until the definitive agreement.
In this glossary:
LOI — more formal document that follows the term sheet.
Earn-out — contingent tranche typically agreed in the term sheet.
Working capital — affects payment at closing.
Due diligence — phase that follows the term sheet/LOI.
Consideration structure — how EV is split between cash, note, and contingent tranches in the term sheet.
Sources
- Ballard Spahr LLP — Letters of intent and term sheets in the context of M&A transactions, Lexology (2012)
- Duffy Robinett, Eileen; Brown, Jeffrey N. — Before You Sign: Four Lessons for Using Letters of Intent, Thompson Coburn LLP (2025)
- Trinity International LLP — Legalese – Drafting Letters of Intent/Terms Sheets, Trinity International LLP (2026)
The term sheet aligns economic expectations before investing in due diligence and legal drafting; negotiating it well avoids friction later. To see how it fits into the sale process in Mexico, see the guide to selling a business in Mexico.
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