If you’ve ever negotiated a term sheet for an M&A transaction, you’ve probably heard — or said — some version of “don’t worry, it’s non-binding.” That statement is usually true. It’s also, in my experience, one of the more dangerous half-truths in dealmaking.
Most term sheets and letters of intent (LOIs) do state, front and center, that the document is non-binding as to the deal terms — price, structure, key deal points. But almost every well-drafted term sheet also carves out a handful of provisions that are binding, effective the moment both sides sign, whether or not the deal ever closes. Missing that distinction — or missing when a binding obligation actually expires — is where a lot of avoidable disputes come from.
The Basic Structure: Mostly a Handshake, With Exceptions
A typical term sheet will include language like: “Except for Sections X, Y, and Z, this Term Sheet is not intended to be, and does not constitute, a binding agreement between the parties.” That single sentence is doing two jobs at once. It’s telling you the deal itself — price, earnout terms, closing conditions — isn’t enforceable yet. But it’s also flagging that specific, named provisions survive as real, enforceable contractual obligations, independent of whether the parties ever sign a definitive agreement.
The provisions that typically get carved out from the general “non-binding” rule – and are therefore binding, include:
- Confidentiality — obligations to protect information exchanged during diligence
- Exclusivity / no-shop — a commitment not to negotiate with other buyers or sellers for a set window
- Governing law and dispute resolution — which state’s law applies and how disputes get resolved
- Expense allocation — who pays for what if the deal falls apart
If your term sheet doesn’t clearly separate binding from non-binding provisions, it’s definitely a red flag. Ambiguity here doesn’t protect anyone — it just increases the likelihood of a dispute if the deal falls apart. I also like to make sure that the provision that states which provisions are binding, and any provisions that reference survival periods, are also binding.
The Trap: Survival Periods
Here’s where things get interesting, and where I see confusion, even among sophisticated parties.
Binding provisions in a term sheet don’t necessarily last forever, and they don’t necessarily die when the term sheet does. Many binding clauses come with their own survival period — a defined window during which the obligation continues to apply, measured from signing, from termination of exclusivity, or from the date the parties walk away from the deal entirely.
A confidentiality obligation might survive for two or three years after the term sheet terminates. An exclusivity period might run for 60 or 90 days and then simply expire on its own, with no notice required. A no-shop covenant might terminate automatically if a definitive agreement isn’t signed by a specified outside date.
The trap is this: people often treat the term sheet as a single unit with a single expiration point. It isn’t. You can have:
- The overall term sheet, which terminates on a certain date or event
- Binding provisions within it, each with its own independent survival clock
- Some of those survival clocks running well past the term sheet’s own termination
That mismatch catches people on a regular basis. A seller assumes that once exclusivity ends, they’re free to talk to anyone — but confidentiality obligations from the same document are still very much alive and enforceable. A buyer assumes walking away from a deal ends all obligations — but the expense reimbursement clause they agreed to survives specifically for that scenario.
The Practical Takeaway
Treat every term sheet as two documents layered on top of each other: an aspirational, non-binding roadmap for the deal, and a short list of real, enforceable promises hiding inside it. Before signing anything, ask three questions:
- Which specific provisions are carved out as binding?
- Does each of those provisions have its own survival period, and when does the clock start?
- What happens to those obligations if the deal falls apart — do they end, or are they designed to outlast the deal itself?
A term sheet is meant to build momentum toward a deal, not to create a hidden minefield of ongoing obligations. Getting the binding/non-binding line — and the survival mechanics attached to it — right at the LOI stage saves everyone a much harder conversation later if things happen to go sideways.
If you’d like to discuss term sheets or any other corporate matter, please feel free to contact David Wittmann at david.wittmann@mclane.com.