Navigating Term Sheets and Letters of Intent in Acquisition Transactions

Term sheets and letters of intent (LOIs) serve as critical instruments in acquisition transactions, outlining the commercial and legal contours of a potential deal. For acquirers and sellers alike, these documents are strategic tools that establish the framework for negotiation, mitigate future disputes, and provide clarity on deal expectations.

We outline key considerations and best practices for drafting and negotiating term sheets and letters of intent (LOIs), with a particular focus on deal execution in the Middle East.

Defining Purpose and Intent

The primary function of a term sheet or LOI is to articulate the foundational aspects of a transaction before parties invest significant resources in due diligence or legal documentation. Whether the transaction involves a complete acquisition, partial equity stake, or a strategic partnership, the term sheet should set out:

• The purchase price and how it is determined (e.g. locked box mechanism vs. completion accounts);

• The proposed deal structure;

• Key legal and commercial conditions;

• Governance and shareholder matters post-transaction.

A common pitfall is the assumption that term sheets are inherently non-binding. In reality, they can be structured as binding, non-binding, or partially binding, depending on the parties’ commercial objectives. For example, confidentiality, exclusivity, and governing law provisions are often drafted as binding, even where the broader deal terms remain indicative.

Clarifying Deal Structure

The structure of the transaction must be explicitly defined. Broadly, transactions can take the form of:

• Share purchases, where equity ownership transfers to the buyer;

• Asset purchases, which involve acquiring specific assets and liabilities of the business;

• Share issuances, typically in growth-stage deals where new shares are created;

• Share swaps are relevant in mergers or where the transaction consideration is equity-based.

Each route carries different regulatory, tax, and legal implications, particularly in jurisdictions such as Saudi Arabia or the United Arab Emirates (UAE), where foreign ownership laws, zakat (one of the five pillars of Islam, being an obligatory form of charity for Muslims who meet certain wealth criteria), corporate tax considerations, and company licensing structures may impact the transaction’s feasibility.

Establishing Timelines and Milestones

Clearly defined timelines and milestones protect against delays, allowing both parties to manage risk and resources effectively. The term sheet should include:

• The proposed date for signing the definitive agreements;

• Duration of the exclusivity period (if applicable);

• Deadlines for completion of due diligence;

• Anticipated closing date.

Exclusivity provisions are significant in competitive processes, ensuring the buyer has sufficient time to evaluate the opportunity without the risk of being outbid or pre-empted.

Conditions to Closing

Term sheets should also identify conditions precedent to completion. Common examples include:

• Satisfactory completion of legal, financial, and tax due diligence;

• Regulatory or shareholder approvals;

• Key employee retention or contract renewals;

• Agreement on the definitive transaction documents.

  
  

Where applicable, post-closing obligations, such as escrow arrangements, transition support from sellers, or earn-out mechanics, should also be flagged to manage expectations on both sides.

Addressing Governance and Shareholder Rights

If the acquisition results in shared ownership (i.e. less than 100% buyout), it is vital to outline the intended structure of the shareholders’ agreement. This should include:

• Drag-along and tag-along rights to ensure flexibility in future exits;

• Pre-emption rights to maintain ownership proportion;

• Board composition and reserved matters;

• Exit rights and lock-in periods.

Including a summary of these terms in the term sheet prevents misalignment later during the legal drafting process and can be especially valuable in founder-led or family businesses, where decision-making dynamics are sensitive.

Transition and Integration Considerations

In cases involving 100% acquisitions, transitional provisions may be necessary to ensure business continuity and stability. These can include:

• Short-term consultancy agreements with founders;

• Knowledge transfer mechanisms;

• Use of existing infrastructure, systems, or personnel during a defined transition period.

While often overlooked at the term sheet stage, signalling these items early helps align on the post-acquisition integration roadmap and reduces operational friction post-close.

Negotiating term sheets and LOIs are not binding sale agreements, but they do serve as the compass for navigating the complexities of an acquisition. Clarity, precision, and foresight at this stage often determine the smoothness of the transaction that follows.

Whether you are acquiring a fast-growth technology company, a legacy family business, or entering a joint venture in the GCC, approaching the term sheet with strategic intent is a hallmark of effective dealmaking.

By aligning legal structures with commercial objectives and anticipating future negotiation challenges, both buyers and sellers can ensure a foundation of trust, transparency, and transactional success.

To discuss this further, contact Zarak Khan

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This material is provided for general information only. It should not be relied upon for the provision of or as a substitute for legal or other professional advice.