Practitioner’s Guide

Overview

This is a founder-friendly term sheet for the acquisition of 100% of the capital stock of a privately held US target corporation by a private equity sponsor, typically through a newly formed acquisition vehicle. It memorializes the headline economic and structural terms — purchase price, working capital, earn-out, rollover, Management Equity Incentive Pool (MEIP), exclusivity, financing, and definitive-document framework — before the parties commit to drafting a full stock purchase agreement.

The sponsor-favorable Practical Law version of this form is drafted to maximize PE optionality: a broad financing condition, unrestricted diligence access, a long exclusivity window, a one-way expense reimbursement trigger, buyer-selected earn-out metrics with no operating covenants, and discretionary MEIP sizing. This sell-side version preserves the same section architecture and the same binding/non-binding carve-out — Confidentiality, Exclusivity, Expenses, Governing Law, Third-Party Beneficiaries, and Non-Binding Nature are the only enforceable provisions — but materially rebalances every non-binding and binding term in the seller’s favor.

The document remains non-binding as to commercial terms (price, earn-out, conditions, definitive agreement) and binding only as to the enumerated carve-outs. Keep that structure — it protects both sides from prematurely committing to a deal — but treat each binding provision as fully enforceable, because it is. And draft the earn-out, working capital, and rollover sections with the same care as binding provisions: sponsors will re-negotiate them at definitive-agreement stage using the term sheet as the starting point.

When to Use

Use this term sheet when a PE sponsor has moved from preliminary interest to a committed bilateral negotiation on a stock acquisition and the seller wants a document that memorializes headline terms without ceding the sponsor’s typical leverage. It is appropriate when (i) the sponsor has done enough preliminary diligence to propose economic terms, (ii) the parties want to memorialize headline terms — purchase price, working capital adjustment, earn-out, financing, rollover, MEIP, and exclusivity — without yet drafting a full LOI or definitive agreement, and (iii) the sponsor expects to form a NewCo acquisition vehicle and contemplates management equity rollover.

This sell-side form is particularly well-suited to founder-owned or family-owned targets where (a) management continuity is part of the deal thesis, (b) the sponsor contemplates an MEIP that could dilute the seller’s rollover equity, and (c) the sponsor has proposed an earn-out or financing condition that the seller wants to push back on at the term-sheet stage rather than the LOI or definitive-agreement stage.

Do not use this form for asset acquisitions (use the asset-purchase term sheet), strategic-buyer deals (strategic buyers typically do not contemplate management rollover or MEIP in the same way), public-company targets (which require Revlon-aware deal-protection and fiduciary-out language), or fully binding preliminary agreements (this form is explicitly non-binding except for the enumerated carve-outs).

Binding vs. Non-Binding Provisions

Only six sections create enforceable obligations: Confidentiality, Exclusivity, Expense Reimbursement / Expenses, Governing Law, Third-Party Beneficiaries, and Non-Binding Nature. Everything else — purchase price, earn-out, working capital adjustment, financing condition, rollover, MEIP, employment, diligence, conditions, and definitive-agreement framework — is a non-binding framework subject to satisfactory diligence, investment-committee approval, and execution of definitive documentation.

The opening paragraph of the term sheet enumerates the binding sections. Confirm after any mark-up that the enumerated list exactly matches the section headings used later in the document — a renumbering or renaming error can flip the binding/non-binding structure and create either unintended liability or unintended gaps in the enforceable framework.

For the seller, the binding provisions are where the real negotiation happens. Non-binding commercial terms (price, earn-out, working capital) will be reopened the minute confirmatory diligence surfaces anything; but the exclusivity clock, the expense reimbursement trigger, the confidentiality framework, and the governing law selection will hold throughout the process and, in the case of confidentiality and any exclusivity tail, may survive termination. Treat every binding provision as if it were fully enforceable — because it is.

Key Variables to Complete

• [FUND NAME] / Sponsor — the PE fund sponsoring the acquisition; the seller should confirm the sponsor’s identity (fund versus co-invest vehicle versus SPV) and ensure that the sponsor’s commitment letter, if any, runs to the same entity named in the term sheet.
• [NEWCO / BUYER] — the newly formed acquisition vehicle; the term sheet should flag whether the parent fund provides an equity commitment letter or limited guaranty, and whether NewCo is required to maintain minimum capitalization until closing.
• [COMPANY NAME] / [SELLER NAME] / [STOCKHOLDER NAME] — target company and selling stockholder(s). For multi-stockholder deals, add a joint-and-several signature block or a sellers’ representative concept.
• [STATE] — state of incorporation for Seller and Company, and governing law state. Seller preference: Delaware for corporate matters, seller’s home state as an alternative. Avoid sponsor’s home jurisdiction unless neutral.
• $[AMOUNT] — Initial Purchase Price; closing payment portion; escrow holdback (seller preference: 5% for 12–18 months, or R&W insurance in lieu of escrow).
• Working capital target $[AMOUNT] — specify calculation methodology: normalized trailing 12-month average, US GAAP consistently applied with historical practice, exclusion of one-time items, independent-accountant dispute resolution.
• Earn-out structure — Maximum Earn-Out Payment, adjusted EBITDA definition (with seller-favorable inclusions and exclusions), minimum EBITDA thresholds, earn-out multiple, measurement period (seller preference: 1–2 years, not 3–5), and operating covenants to prevent buyer manipulation.
• Financing condition — seller preference: DELETE. If retained, require sponsor to provide committed debt financing papers with the term sheet, a reverse break fee for financing failure, and a specific outside date.
• Management Equity Rollover percentage — seller preference: specify rollover percentage, form of rolled equity (common versus preferred versus LP interests), tax treatment (Section 351/368 tax-free exchange preferred), and pre-tax valuation methodology.
• Management Equity Incentive Pool size — seller preference: MEIP carved out of sponsor’s equity, not dilutive to rolled seller equity; size capped (typically 8–12%); vesting tied to time plus performance; strike price based on fair market value at closing.
• Employment agreement terms — duration, base compensation, bonus targets, severance, non-compete scope; for founder-employees, ensure the non-compete is structured as a sale-of-business covenant (enforceable under most state law) and complies with applicable FTC non-compete rules.
• Exclusivity period length — typically 30, 45, 60, or 90 days. Seller preference: 30–45 days with sponsor milestones; accept 60 days only with committed debt financing and a concrete definitive-agreement timeline.
• Expense reimbursement trigger — seller preference: strike entirely, or cap and make reciprocal. If retained, limit to sponsor’s bad-faith termination by seller and exclude any failure-to-finance scenario.
• [DATE] — Bid Expiration date and time; outside termination date; NDA reference date (must match actual NDA execution date).
• Signature blocks for [FUND NAME] / [SPONSOR] and [SELLER].

Negotiation Points

• Earn-out structure and operating covenants. The sponsor form leaves adjusted EBITDA, minimum EBITDA, and earn-out multiple to “the definitive documentation” with no guardrails. This is the single biggest landmine in a PE deal: sellers routinely lose earn-out disputes when sponsors reorganize the target post-closing and depress EBITDA. Seller must insist at the term-sheet stage on (i) a defined set of operating covenants requiring the sponsor to operate the Company consistent with historical practice, maintain the existing customer and product mix, fund working capital on arm’s-length terms, not allocate non-Company overhead, and not take actions primarily intended to reduce the earn-out; (ii) broad adjusted-EBITDA definition including add-backs for transaction-related items, one-time expenses, and synergy initiatives; (iii) measurement period of 1–2 years (not 3–5); (iv) acceleration on sale, IPO, or material restructuring; (v) independent-accountant dispute resolution; and (vi) an obligation to provide monthly or quarterly earn-out calculations and supporting detail.
• Financing condition. The sponsor form makes closing conditional on sponsor receiving debt financing on terms “reasonably acceptable” to buyer. Seller must strike this. If sponsor will not close without financing, seller should demand: (i) committed debt financing letters delivered with the term sheet; (ii) a reverse break fee (typically 5–8% of enterprise value) payable if sponsor fails to close due to financing failure; (iii) a specific outside date after which seller may terminate and collect the break fee; (iv) seller’s ability to specific-performance the equity commitment separately from the debt financing. Sophisticated sponsors with committed debt drop the financing condition entirely — asking for it at the term-sheet stage signals weakness.
• Working capital target. Sponsor form calls for working capital target of $[NUMBER] with US GAAP consistency. Seller must specify: (i) target based on normalized trailing 12-month average (not snapshot, not sponsor-selected month); (ii) exclusion of one-time, non-recurring, and transaction-related items; (iii) deal-specific definition of current assets and current liabilities (e.g., whether deferred revenue is included or excluded); (iv) independent-accountant dispute resolution with scope limited to items in dispute and costs shared pro rata; (v) no separate carve-out for indebtedness beyond standard funded debt; (vi) seller’s ability to review and comment on sponsor’s closing calculation before it becomes binding.
• Management equity rollover structure. Sponsor form leaves rollover as “to-be-agreed percentage.” Seller must specify at term-sheet stage: (i) rollover percentage (typically 10–30% for founder-heavy deals); (ii) form of rolled equity (common equity in NewCo, not deeply subordinated securities); (iii) tax-free treatment under Section 351 (contribution in exchange for stock) or Section 368 (reorganization); (iv) pre-tax valuation methodology (rolled equity valued at same per-share price as cash consideration, no liquidity discount); (v) information rights; (vi) tag-along rights on sponsor exit; (vii) no drag-along below the cash sale price without rolled-equity consent; (viii) vesting treatment if rolled equity includes any earn-back or performance component; (ix) call rights limited to “for cause” terminations; (x) whether rolled equity carries preferred return or only common upside.
• Management Equity Incentive Pool (MEIP). Sponsor form provides that MEIP shares represent [NUMBER]% of fully diluted equity and are issued to participants “selected by the Buyer.” Seller must negotiate: (i) MEIP size (8–12% is typical, not 20%); (ii) MEIP dilution allocated to sponsor equity and rolled equity pro rata, NOT disproportionately to rolled sellers; (iii) MEIP participants identified at term-sheet stage where possible; (iv) MEIP vesting schedule (typically 20% per year over 5 years, with cliff and acceleration on change of control); (v) strike price based on fair market value at closing, not subsequent valuation; (vi) preservation of MEIP vesting on termination without cause; (vii) MEIP governance (sponsor versus board versus CEO selection).
• Exclusivity period length and carve-outs. Sponsor form typically calls for 60–90 day exclusivity with no fiduciary out. Seller counter: (i) 30–45 day initial exclusivity period, with any extension requiring mutual written agreement tied to sponsor milestones (definitive-agreement draft delivery, diligence completion, financing commitment); (ii) an explicit fiduciary out allowing the board to consider unsolicited superior proposals consistent with fiduciary duties; (iii) termination right for seller if sponsor fails to pursue diligence in good faith, materially changes economic terms, or fails to deliver a draft definitive agreement by a specified date; (iv) no requirement to disclose identity of third-party bidders unless and until the board determines to engage in substantive discussions.
• Expense reimbursement. Sponsor form includes a one-way trigger: if seller fails to sign definitive documentation reflecting the term sheet terms, seller pays sponsor’s expenses. Seller must strike entirely. If sponsor insists: (i) cap the amount ($250k–$500k is typical for PE deals); (ii) limit triggers to seller’s bad-faith termination or acceptance of a Superior Proposal; (iii) exclude reimbursement if sponsor walks, fails to pursue diligence in good faith, changes economic terms materially to seller’s detriment, or fails to deliver a definitive agreement by a specified date; (iv) make reimbursement reciprocal — if sponsor is at fault, sponsor pays seller’s expenses; (v) reconcile against any reverse break fee for financing failure.
• Definitive agreement architecture — R&W insurance vs. escrow. Modern PE deals increasingly replace escrow and seller indemnification with representations-and-warranties insurance. Seller should flag at term-sheet stage: (i) whether R&W insurance is expected; (ii) retention level (typically 0.5–1% of enterprise value, split between sponsor and seller); (iii) premium allocation (sponsor typically bears, or split); (iv) seller indemnification capped at retention (walk-away from insurance coverage); (v) fundamental reps carved out of insurance and subject to separate indemnification with longer survival; (vi) specific indemnities for known issues surfaced in diligence. R&W insurance fundamentally changes the risk allocation and must be negotiated early.
• Non-compete scope and FTC compliance. Sponsor form requires seller to enter into restrictive covenants of [NUMBER] years. Seller must (i) narrow duration to 2 years for non-compete, 2 years for non-solicit; (ii) narrow geographic scope to jurisdictions where Company actively does business; (iii) narrow restricted business to specific products/services of Company, not broad industry; (iv) carve out passive investments below 5% of public companies; (v) ensure the covenant is structured as a sale-of-business covenant (enforceable under most state law); (vi) comply with the FTC final non-compete rule as currently in effect and with state-level prohibitions (California, Minnesota, and others); (vii) for individual founder-employees, ensure the covenant is separately consideration-supported and acknowledged.
• Conditions to closing — MAC carve-outs. Sponsor form includes a bare “no material adverse change” condition. Seller must insist on carve-outs for: (i) general economic, political, or financial market conditions; (ii) industry-wide conditions affecting similarly situated businesses; (iii) changes in law or accounting standards; (iv) acts of war, terrorism, pandemics, or natural disasters; (v) changes caused by the announcement or pendency of the transaction; (vi) actions taken at sponsor’s request or with sponsor’s consent. MAC should be limited to disproportionate effects and exclude normal operating variability. Also strike “prospects” from the MAC list — a forward-looking MAC is effectively a free option for the sponsor.
• Investment committee approval. Sponsor form preserves “IC approval” as a non-binding out. Seller should either (i) require sponsor to obtain IC approval before signing the term sheet (so the term sheet is committed as far as the sponsor is concerned) or (ii) accept IC approval as a condition but impose a deadline (typically 15 business days from term-sheet execution) after which seller may terminate exclusivity.
• HSR Act and regulatory timing. For HSR-reportable deals, the term sheet should flag (i) HSR filing responsibility and fees (typically shared or allocated to sponsor); (ii) commitment to file promptly after signing the definitive agreement; (iii) efforts standard for obtaining regulatory approval (sponsor push: “reasonable best efforts”; seller push: “reasonable best efforts including divestitures up to [cap]”); (iv) timing for regulatory-related outside date.

Common Pitfalls

• Treating the earn-out as a term-sheet placeholder to be negotiated in definitive documentation. Earn-outs are the single most common source of post-closing M&A litigation. Every earn-out dispute traces back to vague definitions and missing operating covenants in the term sheet — nail them down now, not later.
• Accepting a financing condition without a reverse break fee. The financing condition is a free option for the sponsor to walk. If the seller accepts it without a break fee, the seller is bearing all of the financing risk for free.
• Failing to structure management rollover as a tax-free exchange. Rollover equity is often treated as taxable consideration by default. Section 351 or 368 treatment requires careful structuring at the term-sheet stage, including ensuring NewCo has sufficient capitalization and that the rollover percentage meets the applicable thresholds.
• Letting the MEIP dilute rolled equity disproportionately. If the MEIP is “reserved from the Company’s fully diluted equity,” it dilutes rolled sellers and new sponsors equally — but sellers bear the full economic cost because sponsors price the MEIP into the valuation they pay. Allocate MEIP dilution to sponsor equity, not rolled equity.
• Missing the FTC non-compete rule analysis. The FTC final rule banning most new worker non-competes was published in 2024 and has been subject to ongoing litigation and uncertain enforcement. Sale-of-business covenants are exempted, but the drafting must make clear that the covenant is supported by the sale of the business, not general employment.
• Forgetting that the enumerated binding-sections list must exactly match the section headings. A rename in mark-up (‘Exclusivity’ to ‘No-Shop’) can inadvertently remove a binding section from the carve-out and make it non-binding, or vice versa.
• Leaving the working capital adjustment as a $[NUMBER] placeholder. The target and methodology must be specified at term-sheet stage or the sponsor will impose its own calculation later with no recourse.
• Allowing the sponsor to specify adjusted EBITDA unilaterally in the earn-out. A sponsor-defined EBITDA strips out every add-back the seller needs (transaction expenses, restructuring, synergy initiatives, non-recurring items).
• Leaving the MAC as a bare ‘material adverse change’ including ‘prospects.’ A forward-looking MAC with no carve-outs is effectively a buyer option to walk away for any reason.
• Ignoring R&W insurance at term-sheet stage. R&W insurance fundamentally changes the risk allocation and must be negotiated early — retention levels, fundamental rep carve-outs, and premium allocation all need to be specified before the definitive agreement is drafted.
• Accepting a long exclusivity window (60–90 days) without sponsor milestones. Long exclusivity transfers leverage to the sponsor and prevents the seller from pursuing alternatives while sponsor diligence drags on.
• Forgetting to identify the acquisition vehicle’s capitalization and parent guaranty. NewCo is a shell. Without an equity commitment letter or limited guaranty from the sponsor fund, the seller’s remedies for specific performance or damages may be worthless.

When NOT to Use This Form

• Asset acquisitions — use the asset-purchase term sheet. Asset deals have different tax consequences, liability allocation, and consent mechanics, and do not typically contemplate rollover or MEIP in the same way.
• Strategic buyer deals — strategic buyers typically do not contemplate management rollover, MEIP, or NewCo acquisition vehicles, and their term sheets emphasize synergies, integration, and retention bonuses rather than sponsor economics.
• Public-company targets — public-company deals require Revlon-aware deal-protection provisions, fiduciary-out language, go-shop considerations, proxy/tender mechanics, and Regulation M-A compliance that this form does not address.
• Fully binding preliminary agreements — this form is explicitly non-binding except for the enumerated carve-outs. For a binding preliminary agreement, use a letter of intent with more specific binding provisions or jump directly to definitive documentation.
• Deals with stock consideration or mix of cash and stock — stock-consideration deals require valuation mechanics, registration rights, lock-ups, and structural provisions not addressed in this form.
• Cross-border deals — cross-border PE acquisitions involve CFIUS, foreign-investment review, transfer pricing, and tax considerations that require specialized term-sheet provisions.
• Distressed or 363 sale transactions — these require different deal-protection, financing, and court-approval mechanics.

Key Founder Protections (Summary)

• Earn-out with defined adjusted-EBITDA add-backs, operating covenants, 1–2 year measurement period, acceleration on sale/IPO/restructuring, and independent-accountant dispute resolution.
• Financing condition deleted, or replaced with committed debt financing papers and a reverse break fee for financing failure.
• Working capital target based on normalized trailing 12-month average with specified methodology, one-time item exclusions, and independent-accountant dispute resolution.
• Management rollover structured as a Section 351/368 tax-free exchange, valued at cash-equivalent per-share price, with common equity in NewCo, tag-along rights, and limited drag-along.
• Management Equity Incentive Pool capped at 8–12%, with dilution allocated to sponsor equity, performance-plus-time vesting, fair-market-value strike, and acceleration on change of control.
• Exclusivity limited to 30–45 days with explicit fiduciary out, sponsor milestones, and seller termination rights for sponsor default.
• Expense reimbursement deleted, or capped and reciprocal, excluding financing-failure scenarios.
• R&W insurance framework with retention level, premium allocation, and fundamental-rep carve-outs specified at term-sheet stage.
• Non-compete limited to 2 years, narrow geography, specific Company business, structured as sale-of-business covenant, FTC/state-law compliant.
• MAC condition with full set of standard carve-outs (general economy, industry, law, pandemics, announcement effects, sponsor-requested actions), ‘prospects’ stricken, disproportionate-effect limiter.
• NewCo acquisition vehicle supported by sponsor fund equity commitment letter or limited guaranty.
• Investment committee approval deadline (typically 15 business days) after which seller may terminate exclusivity.
• Enumerated binding-sections list verified against current section headings after every mark-up.
• Governing law defaulted to Delaware or seller’s home jurisdiction, not sponsor’s home jurisdiction.
• HSR and regulatory timing with shared-or-sponsor-allocated filing fees and specific efforts standard.

Form Document

TERM SHEET

ACQUISITION OF ALL OF THE CAPITAL STOCK OF [COMPANY NAME]

This term sheet (the “Term Sheet”) sets forth the principal terms and conditions for a proposed acquisition by [FUND NAME] (“Sponsor”) from [STOCKHOLDER NAME] of 100% of the capital stock of [COMPANY NAME] (the “Company”), a corporation organized under the laws of [STATE]. This Term Sheet is for discussion purposes only. Other than with respect to the sections below entitled “Confidentiality,” “Exclusivity,” “Expense Reimbursement; Expenses,” “Governing Law,” “Third-Party Beneficiaries,” and “Non-Binding Nature,” which shall be binding on the parties hereto to the extent set forth herein, this Term Sheet is not a binding agreement and does not represent an offer or commitment of any nature from any of the parties hereto or their respective affiliated entities to engage in negotiations regarding, or to enter into any contract or agreement effecting, the transactions contemplated herein. Other than as specified above, this Term Sheet does not impose any liability on any party if the transactions contemplated herein are not consummated. The terms and conditions of this Term Sheet are subject in all respects to Sponsor’s satisfactory commercial and legal due diligence, approval of the transaction and documentation by Sponsor’s investment committee (which Sponsor shall use commercially reasonable efforts to obtain within fifteen (15) business days after the date of this Term Sheet), and the execution by the parties of a sale and purchase agreement and any other documents or agreements necessary to effect the transactions contemplated hereby.

Parties

Seller: [SELLER NAME], a [corporation/limited liability company] organized under the laws of [STATE] (the “Seller”).

Buyer: A newly formed corporation organized by Sponsor for the purpose of consummating the transactions contemplated by this Term Sheet (the “Buyer”). Sponsor shall provide an equity commitment letter or limited guaranty, in form and substance reasonably satisfactory to Seller, pursuant to which Sponsor commits sufficient equity financing to NewCo to consummate the Transaction. Buyer’s obligations under this Term Sheet and any definitive documentation shall be supported by such equity commitment or guaranty, and Seller shall be an express third-party beneficiary with the right to specifically enforce such commitment.

Proposed Transaction

Buyer shall acquire directly all of the outstanding shares of capital stock of the Company (the “Shares”), free and clear of all encumbrances (other than restrictions under applicable securities laws), at the closing of the Transaction (such acquisition, the “Transaction”).

Initial Purchase Price

The initial purchase price to be paid by Buyer for the Shares shall be an amount equal to $[NUMBER] (the “Initial Purchase Price”), subject to adjustment as set forth herein, and payable in cash or other immediately available funds as follows: (i) $[NUMBER] (representing approximately 95% of the Initial Purchase Price) payable at the closing of the Transaction by wire transfer of immediately available funds; and (ii) $[NUMBER] (representing approximately 5% of the Initial Purchase Price) to be deposited with a mutually agreeable escrow agent at Closing, to be held for a period of twelve (12) months after the Closing to secure the performance of Seller’s post-closing indemnification obligations under the definitive purchase agreement (other than obligations relating to Fundamental Representations, which would have longer survival and would not be subject to the general escrow). The parties shall consider replacing the escrow with buyer-side representations-and-warranties insurance (“R&W Insurance”) at definitive-agreement stage, with retention level, premium allocation, and coverage terms to be specified therein.

The parties agree that they will structure the payments of the Initial Purchase Price in a tax-efficient manner to the extent practicable, and any such structure shall be subject to the mutual agreement of the parties. The parties currently intend to structure the Transaction as the purchase of the Shares and do not contemplate restructuring as an asset purchase absent extraordinary tax or legal considerations.

Adjustments to Initial Purchase Price

The Initial Purchase Price shall be adjusted as follows:

(a) Working capital at the closing of the Transaction shall be $[NUMBER] (the “Target Working Capital”), calculated in accordance with US GAAP consistently applied with the Company’s historical practice over the preceding twelve (12) months, normalized to exclude one-time or non-recurring items. The Purchase Price payable at closing will be increased or decreased based on the difference between actual working capital at the closing and the Target Working Capital, on a dollar-for-dollar basis. Any dispute regarding the calculation of closing working capital shall be resolved by an independent accounting firm mutually selected by the parties, whose scope is limited to items in dispute and whose costs are shared pro rata based on the proportion of each party’s position adopted.

(b) The Purchase Price payable at closing will be decreased by the amount of funded indebtedness (excluding capitalized leases entered into in the ordinary course, deferred revenue, customer deposits, and trade payables incurred in the ordinary course) of the Company outstanding at the closing, on a dollar-for-dollar basis.

(c) The Purchase Price payable at closing will be reduced by the amount of unpaid Seller transaction expenses (meaning fees and expenses of Seller’s investment bankers, attorneys, accountants, and other advisors incurred in connection with the Transaction and committed to but unpaid as of closing), on a dollar-for-dollar basis. For the avoidance of doubt, Buyer’s transaction expenses are the sole responsibility of Buyer and shall not reduce the Purchase Price.

All adjustments will be estimated on the closing date based on Seller’s good-faith calculation, with a post-closing final adjustment based on actual amounts, subject to Seller’s right to review and comment on Buyer’s closing calculation and to invoke the independent-accountant dispute resolution procedure set forth above.

Earn-Out

Buyer will pay or cause to be paid to Seller up to $[NUMBER] as additional consideration (the “Maximum Earn-Out Payment”). Payments will be calculated based on Adjusted EBITDA for each of the [one (1) / two (2)] fiscal year[s] following the closing date (the “Earn-Out Period”). Each earn-out payment shall be an amount equal to the product of (a) the amount by which the Adjusted EBITDA for such fiscal year exceeds the applicable Minimum EBITDA threshold, multiplied by (b) the Earn-Out Multiple. In no event shall Buyer be obligated to pay more than the Maximum Earn-Out Payment in the aggregate.

“Adjusted EBITDA” means the Company’s earnings before interest, taxes, depreciation, and amortization, calculated consistent with the Company’s historical methodology and including add-backs for (i) transaction-related expenses and fees; (ii) one-time, non-recurring, or extraordinary items; (iii) sponsor management fees, monitoring fees, or allocated corporate overhead not incurred by the Company prior to Closing; (iv) restructuring or integration costs; (v) new-business or synergy initiative investments approved by the parties in writing; and (vi) any other adjustments agreed in the definitive documentation. Adjusted EBITDA shall exclude any sponsor-allocated costs, transfer-pricing adjustments, or similar items not reflecting the Company’s ordinary operations.

Operating Covenants During Earn-Out Period. From and after the Closing through the end of the Earn-Out Period, Buyer shall (i) operate the Company consistent with historical practice and in the ordinary course of business, (ii) maintain the existing customer, product, supplier, and employee mix in all material respects, (iii) fund working capital on arm’s-length terms, (iv) not allocate non-Company overhead or sponsor-fund expenses to the Company in a manner inconsistent with historical practice, (v) not take any action primarily intended to reduce the Adjusted EBITDA or defer revenue recognition, (vi) not dispose of material assets or business lines, (vii) not terminate employees listed as Key Employees without cause, and (viii) provide Seller with monthly (or at least quarterly) Adjusted EBITDA calculations and reasonable supporting detail for Seller’s review.

Acceleration. Upon (i) a sale of the Company, (ii) an initial public offering of the Company or Buyer, (iii) a change of control of Buyer, or (iv) any material restructuring of the Company’s operations outside the ordinary course that would reasonably be expected to depress Adjusted EBITDA, the Maximum Earn-Out Payment (less any earn-out payments previously made) shall be immediately due and payable. Any dispute regarding the calculation of Adjusted EBITDA or the amount of any earn-out payment shall be resolved by an independent accounting firm mutually selected by the parties, whose determination shall be final and binding and whose costs shall be shared pro rata based on the proportion of each party’s position adopted.

The amount actually paid pursuant to these earn-out provisions is the “Contingent Purchase Price” and, together with the Initial Purchase Price, the “Purchase Price.” The parties agree to structure the payments of the Contingent Purchase Price in a tax-efficient manner to the extent practicable.

Financing

Sponsor represents that it has (or will have prior to execution of the definitive purchase agreement) committed debt financing papers sufficient, when combined with sponsor equity, to finance the Transaction and related fees and expenses. Sponsor shall deliver copies of such committed debt financing papers to Seller concurrently with execution of the definitive purchase agreement. The definitive purchase agreement shall not include a financing condition. In the event Buyer fails to close the Transaction due to a failure or unavailability of the debt financing (or otherwise breaches the definitive agreement on closing), Sponsor shall pay to Seller a reverse termination fee equal to [5% / to be agreed] of the Initial Purchase Price, which shall be Seller’s sole and exclusive monetary remedy (without prejudice to Seller’s right to seek specific performance of the Sponsor equity commitment).

To the extent Seller and the Company are requested to provide customary cooperation in connection with Sponsor’s debt financing, such cooperation shall be (i) at Sponsor’s sole expense, (ii) limited to actions that do not unreasonably interfere with the Company’s business, (iii) not required to cause the Company to incur any liability or provide any certification, opinion, or document that would not be effective at or after Closing, and (iv) subject to reasonable advance notice.

Management Equity Rollover

Members of senior management who own equity of the Company (including [NAMES], the “Rollover Sellers”) shall roll over [to be agreed — typically 10%–30%] of such equity at the closing of the Transaction, at the same per-share price used to calculate the Initial Purchase Price (no liquidity discount or valuation markdown). Rolled equity will be received in the form of common equity of NewCo, and the rollover shall be structured as a tax-free exchange under Section 351 or Section 368 of the Internal Revenue Code to the maximum extent practicable.

In connection with the rollover, Rollover Sellers and NewCo shall enter into a stockholders agreement providing for customary rights and obligations including: (i) information rights (monthly or quarterly financials, annual budget, and material transaction notices); (ii) tag-along rights on any sale by Sponsor; (iii) drag-along rights in favor of Sponsor, subject to (A) a minimum price equal to or greater than the per-share price at Closing and (B) customary investor-protection provisions (no additional indemnification, no restrictive covenants beyond the definitive agreement, pro rata consideration); (iv) preemptive rights on new issuances; (v) board representation or observer rights proportionate to rollover ownership; (vi) restrictions on transfer subject to customary carve-outs (affiliates, family trusts, estate planning); and (vii) call rights limited to “for cause” terminations at fair market value. Rolled equity shall vest immediately on closing (no additional earn-back or performance vesting) unless otherwise agreed at definitive-agreement stage.

Management Equity Incentive Pool

NewCo will reserve shares of [common stock / profits interests] representing not more than [8%-12%] of NewCo’s issued and outstanding equity on a fully-diluted basis (the “Management Equity Incentive Pool” or “MEIP”). Shares in the MEIP will be issued to participants identified in a management equity incentive plan approved by NewCo’s board. The MEIP shall provide for (i) a [four- or five-]year vesting schedule with 25% or 20% annual cliff and customary change-of-control acceleration; (ii) strike price or issuance price based on the fair market value of NewCo common equity at Closing (the same per-share price used for the rollover and the cash purchase price); (iii) treatment of vested equity on termination without cause (no forfeiture); (iv) preservation of tax-favorable treatment (incentive stock options or profits interests, as applicable).

Dilution from the MEIP shall be borne pro rata by Sponsor and the Rollover Sellers based on their respective NewCo ownership, provided that Rollover Sellers’ dilution shall not exceed their pro rata share of the MEIP as allocated at Closing (i.e., any post-Closing MEIP expansion shall be allocated to Sponsor equity).

Employment Arrangements

Buyer intends to offer continuing employment at Closing to substantially all of the Company’s employees on terms not less favorable in the aggregate than their current terms of employment. Each of [NAMES] (the “Key Employees”) shall enter into an employment agreement with the Company at Closing for a duration of [NUMBER] years, containing customary provisions including base compensation, bonus targets, severance, and restrictive covenants. The restrictive covenants shall (i) be limited to two (2) years post-termination; (ii) limit geographic scope to jurisdictions where the Company actively does business; (iii) narrow the restricted business to the specific products and services of the Company; (iv) carve out passive investments below 5% of public companies; (v) be structured as sale-of-business covenants to the extent applicable and compliant with the FTC non-compete rule and applicable state law (including the California and Minnesota prohibitions on employee non-competes).

Due Diligence

From and after the date of this Term Sheet, Seller will authorize the Company’s management to provide Buyer and its advisors with reasonable access, during normal business hours and upon reasonable advance notice, to the Company’s facilities, books and records, senior management, and outside advisors for the purpose of completing Buyer’s confirmatory due diligence. Diligence shall be conducted in a manner that does not unreasonably disrupt the Company’s operations. Buyer shall use “clean team” protocols for competitively sensitive information, including pricing, customer lists, and strategic plans. Buyer shall not contact the Company’s customers, suppliers, or employees (other than senior management specifically designated by Seller) without Seller’s prior written consent. All information furnished is subject to the Confidentiality Agreement referenced below.

Conditions

Buyer’s obligation to close the proposed Transaction will be subject to customary conditions, including:

(a) Buyer’s satisfactory completion of confirmatory due diligence, limited to matters that were not reasonably discoverable prior to the date of this Term Sheet;

(b) the Board of Directors and, to the extent required, stockholders of Buyer and Seller approving the Transaction (Sponsor shall use commercially reasonable efforts to obtain investment committee approval within fifteen (15) business days of the date of this Term Sheet);

(c) the Parties’ execution of the Definitive Agreement and any required ancillary agreements;

(d) the receipt of regulatory approvals and material third-party consents, with Sponsor bearing the HSR filing fees (if any) and committing to use reasonable best efforts to obtain required regulatory approvals;

(e) [each of the Key Employees entering into employment agreements in the form agreed by the Parties];

(f) [Seller entering into restrictive covenant agreements consistent with the Employment Arrangements section above]; and

(g) there being no Material Adverse Change in the business, results of operations, or financial condition of the Company (expressly excluding “prospects”), excluding any effects resulting from (i) general economic, political, or financial market conditions, (ii) industry-wide conditions, (iii) changes in law or accounting standards, (iv) acts of war, terrorism, pandemics, or natural disasters, (v) changes caused by the announcement or pendency of the Transaction, or (vi) actions taken at Buyer’s request or with Buyer’s written consent, in each case except to the extent disproportionately affecting the Company relative to peers.

Definitive Agreements

In addition to the provisions described herein, the definitive agreements relating to the Transaction will contain representations, warranties, survival periods, indemnification, limits on indemnification, covenants, termination rights, and other provisions customary for a sell-side PE stock acquisition of this type. The parties contemplate that (i) the definitive agreement will incorporate R&W Insurance in lieu of (or supplementing) the escrow described above, with Buyer purchasing a policy with retention level of 0.5–1.0% of the Purchase Price and the parties sharing the premium on terms to be agreed; (ii) seller indemnification (other than for Fundamental Representations, fraud, and specific indemnities) shall be capped at the R&W Insurance retention; (iii) Fundamental Representations (authority, capitalization, taxes) shall survive for a longer period and be funded outside the R&W Insurance; and (iv) specific indemnities shall be limited to known issues surfaced in diligence and disclosed in the disclosure schedules. The initial draft of the definitive agreement shall be prepared by [Seller’s / Buyer’s] counsel, with initial drafts of the ancillary agreements prepared by Seller’s counsel.

Exclusivity

In consideration of the expenses that Buyer has incurred and will incur in connection with the proposed Transaction, and subject in all cases to the Fiduciary Out set forth below, Seller agrees that during the period commencing on the date of this Term Sheet and continuing until 11:59 PM Eastern Time on the date that is [thirty (30) / forty-five (45)] calendar days after the date of this Term Sheet, or such earlier date as may result from termination pursuant to the Termination section (such period, the “Exclusivity Period”), neither Seller nor any member of the Seller Group (as defined below) shall directly or indirectly: (i) initiate, solicit, or knowingly encourage any proposal or offer from any person other than Buyer and its affiliates (an “Acquisition Proposal”) to acquire all or any significant part of the business, properties, capital stock, or assets of the Company; (ii) enter into substantive negotiations with any third party regarding an Acquisition Proposal; (iii) furnish non-public information regarding the Company to any third party in connection with an Acquisition Proposal; or (iv) enter into any letter of intent, term sheet, or definitive agreement with any third party regarding an Acquisition Proposal. Immediately upon execution of this Term Sheet, Seller shall terminate any then-ongoing discussions with any person other than Buyer regarding an Acquisition Proposal. “Seller Group” means Seller, the Company, and their respective officers, directors, employees, stockholders, subsidiaries, affiliates, and representatives.

Fiduciary Out. Notwithstanding anything in this Term Sheet to the contrary, and in recognition of the fiduciary duties owed by the Company’s board of directors (the “Board”) to the Company and its stockholders, nothing in this Term Sheet shall prevent the Board from: (i) receiving, considering, and responding to any unsolicited bona fide written proposal received during the Exclusivity Period that the Board determines in good faith, after consultation with its legal and financial advisors, constitutes or would reasonably be expected to lead to a Superior Proposal; (ii) furnishing non-public information to, or engaging in discussions or negotiations with, such third party, subject to the third party executing a confidentiality agreement no less restrictive than the existing NDA; (iii) changing, modifying, or withdrawing any recommendation; or (iv) taking any other action the Board determines in good faith, after consultation with counsel, is required to discharge its fiduciary duties under applicable law. “Superior Proposal” means a bona fide written proposal that the Board determines in good faith is reasonably likely to be consummated and, if consummated, would be more favorable to the Company’s stockholders than the Transaction.

Seller Termination Right. Seller may terminate this Term Sheet (and the Exclusivity Period) upon written notice to Buyer if (i) Sponsor fails to obtain investment committee approval within fifteen (15) business days of the date of this Term Sheet, (ii) Buyer fails to pursue diligence in good faith for any continuous seven (7) business day period, (iii) Buyer materially changes the principal economic terms to Seller’s detriment, or (iv) Buyer fails to deliver a draft Definitive Agreement to Seller within fourteen (14) calendar days after the date of this Term Sheet.

Expense Reimbursement; Expenses

Expense Reimbursement — Deleted. Each party shall bear its own transaction expenses. No break-up fee, expense reimbursement, or similar payment shall be payable by either party in connection with the termination of this Term Sheet or the failure to consummate the Transaction, except for the reverse termination fee set forth in the Financing section payable by Sponsor to Seller in the specified financing-failure scenario.

Confidentiality

This Term Sheet is confidential between the Parties and their representatives and is subject to the confidentiality agreement entered into between Buyer and Seller on [NDA DATE] (the “NDA”), which remains in full force and effect. Neither party shall disclose the existence or contents of this Term Sheet except (i) as permitted under the NDA, (ii) as required by applicable law or legal process, or (iii) to such party’s representatives on a need-to-know basis.

Expiration; Termination

This offer will remain in effect until [TIME], [CITY] time, on [DATE], unless accepted or rejected by Seller, or withdrawn by Buyer prior to that time.

After execution by all parties, this Term Sheet will automatically terminate and be of no further force and effect upon the earliest of (a) execution of the Definitive Agreement by Buyer and Seller (and the Company, if required), (b) mutual written agreement of Buyer and Seller, (c) [TIME] on the date that is [30 / 45] calendar days after the date of this Term Sheet, (d) Seller’s termination pursuant to the Seller Termination Right in the Exclusivity section, or (e) the Board’s determination, consistent with the Fiduciary Out, to accept a Superior Proposal. Notwithstanding the foregoing, the sections entitled “Confidentiality,” “Expense Reimbursement; Expenses,” “Governing Law,” “Third-Party Beneficiaries,” and “Non-Binding Nature” shall survive the termination of this Term Sheet. All obligations under “Exclusivity” (including any no-shop obligations) shall terminate automatically on the expiration or termination of the Exclusivity Period and shall not survive in any form.

Non-Binding Nature

This Term Sheet reflects the intention of the Parties, but for the avoidance of doubt neither this Term Sheet nor its acceptance shall give rise to any legally binding or enforceable obligation on any Party, except with regard to the sections hereof entitled “Confidentiality,” “Exclusivity,” “Expense Reimbursement; Expenses,” “Governing Law,” “Third-Party Beneficiaries,” and this “Non-Binding Nature” section. No contract or agreement providing for any transaction involving the Company shall be deemed to exist between Buyer and any of its affiliates and Seller unless and until a final definitive agreement has been executed and delivered. The Parties expressly disclaim any obligation to negotiate in good faith that would survive the expiration or termination of the Exclusivity Period.

Governing Law

THIS TERM SHEET SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF DELAWARE [OR RELEVANT STATE], WITHOUT GIVING EFFECT TO ANY CHOICE OR CONFLICT OF LAW PROVISION OR RULE THAT WOULD CAUSE THE APPLICATION OF LAWS OF ANY JURISDICTION OTHER THAN THOSE OF THE STATE OF DELAWARE [OR RELEVANT STATE]. Each party irrevocably submits to the exclusive jurisdiction of the state and federal courts located in [Wilmington, Delaware / relevant forum] and waives, to the fullest extent permitted by law, any right to a jury trial.

Third-Party Beneficiaries

Except as specifically set forth or referred to herein (including the express third-party beneficiary rights of Seller under any Sponsor equity commitment letter or guaranty referenced in the Parties section), nothing herein is intended or shall be construed to confer upon any person or entity other than the Parties and their successors or assigns any rights or remedies under or by reason of this Term Sheet.

Miscellaneous

This Term Sheet may be executed in counterparts (including by PDF or electronic means), each of which shall be deemed an original. The headings have been inserted for reference only. This Term Sheet may only be amended by a writing signed by both Parties.

If you are in agreement with the terms set forth above and desire to proceed with the proposed Transaction on that basis, please countersign this Term Sheet in the space provided below and return an executed copy by [TIME] on [DATE] to the attention of [NAME].

[FUND NAME / SPONSOR]

By: ____________________________

Name: [NAME]

Title: [TITLE]

Accepted and agreed:

[SELLER NAME]

By: ____________________________

Name: [NAME]

Title: [TITLE]

Date: ____________________________

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This template is provided for informational purposes only and does not constitute legal advice or create an attorney-client relationship. Every transaction is different; consult qualified M&A counsel before using or adapting this document. This term sheet is drafted from the seller’s perspective as a counter to a sponsor-favorable PE term sheet; sponsors, strategic buyers, public targets, and asset-structure deals all require additional review.