It is not uncommon for people in a purchase/sale transaction to get ahead of themselves by believing that once the other party has agreed to the “essential” terms of the transaction, all that remains to get the deal done is to fill in the remaining blanks. The usual result of this misconception is a Buy-Sell Agreement that reflects the “essential” terms as understood by one party and additional terms that that party believes naturally flow from the “essential” terms.
That is when the problems start.
If the essential terms are inserted into the document without discussions with the other party, the usual response is, “We agreed to A and B but we never talked about these other terms. I can’t agree to this.” The deal that looked so simple and obvious now may appear distant.
Instead of working through a Buy-Sell Agreement or even a Letter of Intent it is a better idea to sketch out the fundamental “deal” terms in a document that is variously called a “Term Sheet,” a “Deal Summary,” or “Deal Sheet.” Essentially, the Deal Summary recites in very short form the most essential aspects of the transaction such as the dollar amount, the closing date, the names of the parties, the general nature of the assets to be purchased or sold, and any other key deal facts necessary for the deal to go forward. It is written in plain English with few legalisms and defined terms. Each topic is usually expressed in one sentence statements.
For example: “Purchase Price: $1,000,000 in immediately available funds by wire transfer at Closing with no offsets, holdbacks or reductions; Condition of Assets: As is/where is with no warranty of any kind other than good title.”
The Deal Summary, unlike a Letter of Intent or Memorandum of Understanding, is an unsigned document. This is to emphasize that there is as of yet no legal agreement that binds the parties. It is merely a preliminary consensus as to the essential terms. It should contain a disclaimer stating that it is not an agreement and it may not be relied upon by either party. If a party needs a signature to “lock in” the deal it should instead use a Letter of Intent which specifies that it becomes a binding agreement once each party has materially performed all of its terms and conditions. (The other party may not be too eager to agree to this provision, however.)
Why use a Deal Summary? There are a number of reasons:
• It saves time and money. It is a rare day when a buyer or seller who is given a 20-page Buy-Sell Agreement signs it without reading it and changing it substantially.
• It forces the party that is preparing the Deal Summary to think through both the stated “essential” terms and its unspoken assumptions about related matters.
• It is a litmus test for the parties to determine whether in fact they have reached agreement as to the “essential” deal terms.
• Lastly, the Deal Summary provides information sufficient for the buyer to shop the deal with its lenders or private equity without providing too much information.