What a term sheet settles before the documentation begins.

Most term sheets are deliberately mixed instruments. The commercial terms, price, structure, board composition, earn-out mechanics, are expressed as non-binding, an agreement on the shape of a deal the parties intend to document formally rather than a contract enforceable in its own right. Sitting inside the same document, usually flagged in a clause that says so expressly, is a smaller set of provisions the parties intend to bind immediately: confidentiality, exclusivity, costs allocation, governing law and jurisdiction, and sometimes a break fee if one side withdraws after due diligence has started. The drafting convention that keeps this workable is to state, in terms, which clauses are binding and which are not, rather than leaving a court to infer intention from context. Silence on this point is a common and avoidable defect, because Australian contract law asks what the document objectively communicates about the parties' intention to be bound, and a term sheet reading throughout in firm contractual language invites an argument that the whole document was meant to bind, even where the terms were privately understood as provisional.

The practical risk sits on both sides of the line. Treat too much as binding and a party can find itself locked into a structure before due diligence has tested the assumptions the price was built on, with no clean way to walk back a term without breaching the term sheet itself. Treat too little as binding and the exclusivity a buyer paid for in due diligence costs, or the confidentiality a target extended over its financial position, has no teeth if the counterparty decides mid negotiation to shop the deal elsewhere. The better discipline is to bind exactly the provisions that need to survive a change of heart, and leave the commercial terms expressly non-binding but specific enough that both sides know precisely what they are aiming to document. A term sheet vague about price because it is non-binding anyway has confused non-binding with unspecified, and that confusion is what resurfaces expensively later.

Exclusivity is the provision that buys a counterparty the time and certainty to run due diligence and arrange financing without a competing bidder emerging mid process. It has to answer several questions with precision: the duration of the lock-up, whether it is a no-shop restriction, under which the target cannot solicit competing approaches, or the stricter no-talk restriction, under which the target cannot even engage with an unsolicited approach, and what happens if the period lapses without documentation being signed. Where the party granting exclusivity is a company with directors owing fiduciary duties, or a trustee with duties to beneficiaries, the clause needs an explicit carve-out preserving their ability to consider a superior proposal or discharge a statutory or fiduciary obligation, because a clause drafted without that carve-out can put the grantor's own decision makers in a position where compliance with the term sheet and compliance with their duties pull in different directions.

Confidentiality works the same way in reverse: it protects information rather than time, and fails for the same reason exclusivity fails, when the carve-outs are missing or drafted too narrowly to reflect how information will need to move during the transaction.

A term sheet's conditions are not a single list. They divide into conditions that must be satisfied before the parties will sign binding documentation at all, and conditions precedent to completion once documentation exists, and a term sheet that blurs the two creates real uncertainty about what has to happen, and in what order, for the deal to close. Conditions to reaching signed documentation typically concern due diligence, board or investment committee approval, and finance arranged on satisfactory terms, matters within the parties' own knowledge or control. Conditions precedent to completion typically concern matters outside either party's unilateral control: regulatory approvals, third party consents required under existing contracts, and member or shareholder approval where required. Where the transaction involves acquiring an entity holding an Australian Financial Services Licence, that fact belongs in the term sheet for a different reason: the licensee carries a standing obligation to notify ASIC once the change of control takes effect, a duty that follows completion rather than a condition capable of being satisfied or waived before it, and the term sheet should say so rather than folding it into the conditions list as if it gated completion in the same way a third party consent does.

A well built conditions clause does more than list the conditions. For each one it specifies how the condition is to be satisfied, waived or allowed to lapse, because a list without that machinery is a source of dispute once a condition looks unlikely to be met on time.

The documentation phase is where every point the term sheet left ambiguous, or avoided, comes back at the worst possible time to renegotiate it. Warranty scope is a common example: a term sheet that says only that the seller will give warranties usual for a transaction of this kind gives the drafting lawyers nothing to work from, and the buyer's team will draft the widest package the market will bear while the seller's team pushes back, turning a point that could have been settled in a paragraph into weeks of clause by clause negotiation. Earn-out mechanics are another: a term sheet fixing the earn-out period and the headline metric but saying nothing about how it is calculated, what happens on a change of control during that period, or how disputes are resolved, hands the parties an argument that surfaces only once real money is on the line and each side has invested in its preferred reading of the deal.

The underlying pattern is consistent. A point left soft in the term sheet does not disappear during documentation, it resurfaces with the leverage inverted from where it sat during the term sheet negotiation. At term sheet stage, both parties still have a credible walk away option and roughly equal appetite to keep negotiating in good faith. By the time the transaction has reached drafting, one or both parties have sunk cost into due diligence, advisers' fees and internal approvals, and a party that discovers at that stage that a point it assumed was settled was never actually agreed is negotiating from a materially weaker position than it held earlier. The lawyer drafting the documentation is not the right person to resolve a genuine commercial disagreement about risk allocation, and a term sheet that pushes that resolution downstream is not saving time, it is deferring a cost and adding a fee to it.

The discipline that avoids this outcome is straightforward to state and consistently hard to apply under deal pressure: identify the points that actually carry risk or value, price, conditions, exclusivity, warranty scope, the treatment of key risk items found in early due diligence, and resolve them even where doing so slows the term sheet down or surfaces a disagreement neither side wants yet. The temptation, particularly where the parties know and want to trust each other, is to treat the term sheet as a formality to clear quickly so the real work can start. That instinct inverts the value of the exercise. The term sheet is the cheapest point to have the hard conversation, because neither side has yet paid for drafting, and because a negotiation that surfaces a genuine disagreement, for example about who bears the risk of an unresolved title issue found in due diligence, is doing exactly what it should: showing the parties, before they spend the cost of documentation, whether the deal as struck actually holds together.

This is also where a corporate adviser earns their position in the transaction rather than simply administering it. An adviser who treats the term sheet as a form to be completed, populated with the terms the client states without testing whether they are complete against the categories that reliably cause disputes later, is not doing the work the engagement exists for. An adviser who insists on resolving the conditions architecture, the exclusivity carve-outs and the risk items identified so far, even where the client would prefer to move faster, protects the client from the far larger cost of a documentation phase that reopens the whole negotiation. That discipline is invisible when it works, because the transaction proceeds to close on the terms both sides expected. It becomes visible, and expensive, only in its absence.

A term sheet is not preparation for the real negotiation. It is the real negotiation, conducted while it is still cheap to have. Getting it right means being explicit about which provisions bind the parties immediately and which do not, building exclusivity and confidentiality clauses with carve-outs that reflect how the transaction will need to move, separating conditions to signing from conditions to completion and specifying the endeavours standard and outside date for each, and resolving the commercial points that reliably resurface at documentation, warranty scope, earn-out mechanics, the treatment of known risk items, before drafting starts rather than during it. None of this guarantees a transaction closes. It ensures that if it does not, it fails for a reason the parties identified and accepted early, rather than a disagreement that was always there and simply took the cost of full documentation to expose.