What to Watch Out For When Negotiating an Asset Purchase Term Sheet
You've found the right target. The business makes sense, the price feels right, and both sides are ready to move forward. So you sit down to negotiate the Asset Purchase Term Sheet, the document that frames the entire deal, and that's exactly where things can go sideways if you're not paying close attention.
A Term Sheet is often treated as a preliminary, non-binding document, and that informality can breed complacency. But the terms you agree to at this stage set the tone for every negotiation that follows. Concessions made in a Term Sheet are hard to walk back when you're deep in due diligence with deal momentum building. Here are some of the things I see clients overlook most often, and what to do about them.
Get the Asset Definition Right from the Start
It sounds basic, but one of the most common deal problems starts right here. The definition of "Acquired Assets" needs to be precise, both in what it includes and what it expressly excludes. Buyers often push for broad, catch-all language like "all assets used in the operation of the business," while sellers want to carve out as much as possible. Neither extreme serves the deal well.
Pay close attention to intangible assets: intellectual property, customer contracts, software licenses, domain names, and goodwill. These are frequently the most valuable assets in the deal and the most likely to be disputed. If a customer contract requires third-party consent to assign, that needs to be identified early. Finding out the week before closing is not a position you want to be in. Similarly, watch for assets that appear to be part of the business but are actually held by a related entity or individual, a common structure in closely held businesses that can complicate the transaction significantly. Get the asset schedule right in the Term Sheet and you'll save yourself a great deal of pain later.
Assumed Liabilities: Be Specific, Not Generous
The flip side of the asset definition is the liability question, and it deserves equal attention. In an asset purchase, the buyer has the significant advantage of being able to cherry-pick which liabilities to assume. Don't give that advantage away in the Term Sheet.
Sellers will naturally push to transfer as many liabilities as possible, including accounts payable, deferred revenue obligations, employee-related liabilities, and pending claims. Buyers should insist on assuming only specifically identified and quantified liabilities. Watch out for vague language like "liabilities arising in the ordinary course" because that phrase can swallow a lot of unexpected obligations.
If there are contingent liabilities or potential claims lurking in the background, think employment disputes, customer warranty claims, or regulatory exposure, make sure the Term Sheet's indemnification framework allocates those clearly to the seller. And make sure those indemnification obligations are backed by adequate escrow or holdback arrangements. An indemnification right against a seller who has already spent the purchase price is worth very little.
Earn-Outs Are Trickier Than They Look
Most parties have a general sense of what they're agreeing to on purchase price. What often gets underestimated is the complexity and potential for post-closing conflict embedded in earn-out provisions.
Earn-outs are frequently used to bridge valuation gaps, particularly when a seller believes the business will outperform its historical metrics. In theory, that's a reasonable compromise. In practice, earn-outs are one of the most significant sources of post-closing disputes I see. The problems are usually predictable: earn-out metrics that are vaguely defined, measurement periods that are too short to be meaningful, and the absence of operating covenants that prevent the buyer from taking actions post-closing that would undermine the earn-out entirely.
If a seller is accepting a lower upfront price in exchange for a meaningful earn-out, the Term Sheet needs to include at least a framework for how the buyer will operate the business during the earn-out period. Also scrutinize working capital adjustment mechanisms carefully. These adjustments can materially shift the effective purchase price at closing and are a frequent source of post-closing friction that neither party anticipated at the Term Sheet stage.
Don't Underestimate the MAC/MAE Clause
Closing conditions protect both parties, but they are not created equal. Buyers typically want broad closing conditions, including regulatory approvals, satisfactory due diligence, third-party consents, and protection against material adverse changes. Sellers want conditions that are narrow, clearly defined, and achievable. Loose language here can give a reluctant buyer an easy exit ramp, or leave a seller exposed when a deal falls apart late in the process after significant time and money have been spent.
The Material Adverse Change (MAC) or Material Adverse Effect (MAE) clause deserves particular attention. This provision allows a buyer to walk away if a significant negative event occurs between signing and closing. The scope of what qualifies is heavily negotiated. General economic downturns, industry-wide conditions, and changes in law are typically carved out for the seller's protection, while company-specific deterioration typically is not. Getting this framework right in the Term Sheet avoids an expensive fight later about whether a buyer has the contractual right to terminate.
Exclusivity Provisions: Know What You're Conceding
This one is frequently glossed over in Term Sheet negotiations, and it shouldn't be. Most buyers will insist on an exclusivity or "no-shop" period, a window during which the seller agrees not to solicit or entertain competing offers. For a seller, this is a real concession, and its terms matter more than most people realize.
Watch the length. Exclusivity periods are often proposed at 60 to 90 days, but buyers sometimes push for longer when they anticipate a complex due diligence process. A seller giving up 90 days of market exposure is making a meaningful economic concession, especially if the deal ultimately doesn't close. Sellers should negotiate for a shorter initial exclusivity period with defined extension rights tied to deal milestones, and should insist on a clear termination right if the buyer fails to deliver a definitive agreement or key diligence requests on schedule.
Buyers, on the other hand, need enough runway to conduct meaningful diligence, so the period should be realistic given the complexity of the transaction. Also consider whether the Term Sheet should address break-up fees or expense reimbursement in the event the buyer walks away. These are more common in larger deals, but in any transaction where a seller is making meaningful concessions to get to the table, it's worth the conversation.
The Bottom Line
Negotiating an Asset Purchase Term Sheet well requires experience on both sides of the table. The issues above are not exhaustive. Deal structure, tax considerations, employee matters, and representations and warranties all warrant careful attention. But the Term Sheet is where the deal gets its shape, and getting it right from the start creates a foundation for a smoother process and a better outcome for everyone involved.
If you have questions about an asset purchase transaction or would like assistance drafting or reviewing a Term Sheet, we'd love to connect.
LetsGo@cruxterra.com | 425.830.9268
This article is intended as a general introduction to certain considerations when negotiating an Asset Purchase Term Sheet and does not constitute legal advice. Please consult qualified legal counsel regarding the specifics of your transaction.
