Question & Answer
What’s the Difference Between a Term Sheet, LOI, and SPA?
In deal structuring, the documents used at different stages define the legal framework, expectations, and commitment level of the parties involved. The term sheet, letter of intent (LOI), and share purchase agreement (SPA) each play distinct roles, and understanding their differences can mean the difference between a well-controlled deal and a legal headache.
Term Sheet: The Non-Binding Roadmap
The term sheet is the first step. It is a non-binding document that outlines the key terms of a potential investment or acquisition before lawyers draft the full agreements. Think of it as a high-level summary of the deal, covering valuation, ownership, governance rights, and exit mechanisms.
Key aspects of a term sheet:
- Investment terms: How much is being invested and under what valuation.
- Governance and control: Board seats, voting rights, and decision-making authority.
- Exit rights: Liquidation preferences, anti-dilution protections, and exit strategies.
- Exclusivity and due diligence: Whether the investor gets an exclusive window to finalize the deal.
As highlighted in my book, the term sheet is where negotiation leverage is won or lost. If a clause is not in the term sheet, introducing it later can be difficult. Investors should ensure that critical protections are clearly defined at this stage.
LOI: Formal Intent with Limited Commitment
The letter of intent (LOI) is similar to a term sheet but is typically used when acquiring a company rather than making an equity investment. While term sheets focus on investment terms, an LOI is more formal and includes provisions related to the acquisition process.
Key elements of an LOI:
- Purchase price and payment structure: How much is being paid and on what terms.
- Exclusivity period: A clause preventing the seller from negotiating with other buyers during due diligence.
- Conditions to close: Regulatory approvals, financing contingencies, and due diligence requirements.
- Binding and non-binding provisions: Typically, confidentiality, exclusivity, and break fees are binding, while the rest of the LOI remains non-binding.
An LOI is a stronger commitment than a term sheet but does not yet create a final obligation to close the deal.
SPA: The Legally Binding Contract
The share purchase agreement (SPA) is the definitive, legally binding contract that finalizes the sale of a company’s shares. Unlike a term sheet or LOI, which primarily serve as negotiation tools, the SPA is enforceable and dictates the final transfer of ownership.
Key provisions in an SPA:
- Final purchase price and payment terms.
- Representations and warranties: Assurances made by the seller regarding the business being acquired.
- Indemnification: Protection against undisclosed liabilities or breaches of warranties.
- Post-closing obligations: Non-compete clauses, transition assistance, and escrow provisions.
Investors and acquirers should scrutinize every clause in the SPA, as this is the document that legally defines the transaction. Unlike a term sheet or LOI, once signed, the SPA is legally enforceable.
Which Document is Needed?
Each document plays a distinct role:
- Use a term sheet to align expectations before drafting formal agreements.
- Use an LOI when acquiring a company and securing exclusivity before signing the SPA.
- Use an SPA to finalize the transaction and legally transfer ownership.
Understanding these differences is critical for investors and dealmakers. A well-structured approach ensures smoother negotiations, better risk management, and stronger legal protection.
For a more detailed breakdown of how to structure deals effectively, refer to my book, where I cover these agreements and their strategic use in greater depth.
Deal Structuring
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