Corporate Law
Term Sheet for a Business Sale
Two to six pages decide your deal. Everything that happens afterwards is a retreat from it, never an advance on it.
Written by
Martin Kotze
Attorney, Conveyancer & Notary Public
Last reviewed:
Contents
1. Why the Term Sheet Decides Your Deal
Heads of terms, term sheet, letter of intent — they mean the same thing, and they are usually two to six pages long. Short as that is, it is the single most consequential document in a business sale.
Once it is signed, the deal has a shape. Due diligence tests that shape, the lawyers dress it in definitive language, and closing carries it out — but none of that adds to it. Everything afterwards is a retreat from it, never an advance on it: a buyer who finds a problem in due diligence negotiates a price cut or an indemnity, not a better structure than the one already agreed; a seller who did not reserve a right at heads-of-terms stage is negotiating from a weaker position to get it back later.
That is why five arguments are worth having properly now, while both sides still want the deal to work, rather than four months into due diligence when goodwill has worn thin.
The price mechanism
Locked box, fixed now off a past balance sheet, or completion accounts, trued up after closing.
Escrow
How much of the price is held back, and for how long.
The earn-out
What it is measured against, and who runs the business while it is being measured.
Warranty limits
The periods and the caps you are heading toward.
Restraint scope and duration
How long, and over what area, you are kept out of the market.
2. What Binds and What Does Not
A term sheet is two registers in one document. Most of it — the price, the key conditions, the timeline, how the business will be run after closing, what happens to key employees — records intention only. A short list of clauses is written to bind regardless: exclusivity (the no-shop), confidentiality, a break fee or reverse break fee if the parties have agreed one, and the governing law and dispute clause.
Our own builder’s document follows that same principle, structurally: the body — Articles 2 to 10 — records intention only, and a single closing clause — Article 11, covering confidentiality, exclusivity, access, costs, announcements, governing law and notices — binds on signature. It is worth reading before you send it, because South African courts do not take the document’s title as the answer.
The flip side matters just as much. A bare promise to negotiate towards a final agreement, with no mechanism for breaking a deadlock, is not enforceable — each side keeps an absolute discretion to walk away.
The practical answer is the same one that applies to any letter of intent: say expressly which clauses bind and which do not, and add a “subject to contract” statement for the rest. Read more on how South African law treats a letter of intent.
3. The Twelve Things a Good Term Sheet Settles
A term sheet that is doing its job settles these twelve things — in two to six pages, not fifty.
Parties and what is sold
The correct legal entities, and whether the buyer is acquiring shares or the business and its assets — the two are taxed and transferred differently.
Price and mechanism
The headline price, and whether it is fixed off a recent balance sheet (a locked box) or trued up after closing (completion accounts). Locked Box vs Completion Accounts
Cash, escrow, earn-out
What proportion of the price arrives on closing day, what sits in escrow — typically around 10% where there is no W&I insurance, held in the attorney’s trust account for 18 to 24 months — and what is contingent as an earn-out. Earn-Outs, Escrow & Deferred Payment
Conditions
The approvals the deal actually needs — Competition Commission clearance if you cross the thresholds, a Companies Act s112/s115 special resolution, third-party consents, funding — and no more than that. Signing, Closing & Conditions
Long stop
The date your deal dies if the conditions are not met by then.
Due diligence and access
What the buyer may see, by when, and on what terms of confidentiality. Due Diligence
Exclusivity
The lock-out period — typically 30 to 90 days — kept as short as practicable and with a defined end date.
Timetable
Heads of terms in 2 to 4 weeks, then due diligence, signature, conditions and closing — written down, not left implied. The Sale Process & Timeline
Warranties and limits
The periods you are heading toward — general 18 to 24 months, business 24 to 36 months, tax 7 years — and the caps that go with them. Warranties & Indemnities
Specific indemnities
Known problems ring-fenced by name, with a rand figure attached — not left to a general warranty to catch.
Restraint and transition
How long you are kept out of the market — typically 3 to 5 years, up to 7 supportable — and how the handover actually happens. Restraint of Trade
Documentation, law and forum
Who drafts the first version of the definitive agreement, that South African law governs, and whether disputes go to AFSA arbitration or the High Court.
4. The Buyer’s Checklist
Six things worth pushing for before you sign, from the buyer’s side of the table.
- Exclusivity — lock the seller in before you spend real money on due diligence.
- A funding condition — spelled out plainly: what counts as finance, by when, on what terms. A vague “subject to finance” line gives you nothing to hold the seller to and them nothing to hold you to.
- The conditions you actually need — not a wishlist. Each one is a cost and a delay, and sellers resist a long list on principle.
- A sandbagging position — decide now whether you want to be able to claim on a warranty breach even where you knew about the issue before signing, and say so.
- Indemnities for known problems — put a rand figure against anything early due diligence has already flagged, rather than leaving it to the general warranties.
- The first draft — offering to produce the first draft of the definitive agreement keeps the drafting pen, and the defaults, in your hands.
5. The Seller’s Checklist
And six things worth pushing for from the seller’s side.
- Short exclusivity — the days you are locked in should match how long the buyer genuinely needs, not how long they ask for.
- No funding condition — or, if you must give one, tie it to proof of funds and a short fuse.
- Caps and thresholds — negotiate the warranty cap, the de minimis and the basket now, before the drafting starts and positions harden.
- Restraint sized to the goodwill — a restraint that matches what you are actually selling, not one copied wholesale from an employment contract.
- Section 34 timing — the Insolvency Act’s creditors’ notice runs 30 to 60 days on an asset sale; build it into the timetable, do not discover it at signature.
- VAT zero-rating set up at signature — the going-concern treatment needs four specific things recorded in writing; get the wording into the term sheet now, not retrofitted later.
6. What to Leave “To Be Agreed”
Not every number belongs in a term sheet, and guessing at heads-of-terms stage is worse than saying so honestly. Three figures are routinely left [to be agreed] rather than fixed this early:
De minimis
Often 0.1–0.5% of the price. Individual claims below this threshold do not count at all.
The basket
Often 1–2% of the price. Once qualifying claims cross this total, they become claimable.
Awareness names
The individuals whose actual knowledge defines the seller’s “awareness” — not the whole company.
Naming these as open points, rather than quietly picking a number nobody agreed to, is the point. It tells both sides exactly what due diligence and negotiation still need to settle, and it stops a default nobody chose from becoming the deal by accident. See how these thresholds are actually set in the warranties and indemnities guide.
7. Six Common Mistakes
Accidentally binding the whole deal
Loose wording or conduct can turn a document called a “term sheet” into a full contract (CGEE Alsthom). Mark what is binding, and add a subject-to-contract statement for the rest.
No end date on exclusivity
An open-ended lock-out gives the other side nothing to hold you to — and you nothing to hold them to. Put a date on it.
“Subject to finance” surprises
A funding condition with no detail — what counts as finance, by when, on what terms — lets one side manufacture an exit later.
Ignoring the s34 notice
An asset sale needs the Insolvency Act’s 30- to 60-day advertised creditors’ notice. Leave it out of the timetable and it becomes the reason closing slips.
Assuming zero-rating
Going-concern VAT treatment needs four specific things in writing. Assume it applies without setting them up, and you may find 15% VAT due on the full price.
A restraint copied from an employment contract
An employment-style restraint is the wrong shape for a business sale — here the whole value you are paying for is the goodwill the restraint protects.
8. Build Yours
Our free builder walks you through the eleven decisions above and drafts a term sheet from your answers — from the buyer’s side or the seller’s, for a share sale or a business sale.
Free tool
Eleven guided steps, a rand panel that does the arithmetic as you go, and a document that looks like something a lawyer wrote — PDF and Word, emailed to you.
Articles 2–10 record intention. Article 11 binds.
Already have a draft? Have it reviewed in 24 hours on a fixed fee.
9. FAQ
Is a term sheet legally binding in South Africa?
Not automatically. Like a letter of intent, a term sheet binds only to the extent the parties intended to create legal obligations — South African courts look at the wording, the parties’ conduct and the surrounding circumstances (CGEE Alsthom v GKN Sankey). Most term sheets are written so only specific clauses — confidentiality, exclusivity, costs, governing law — bind, while the commercial terms stay “subject to contract” until the definitive agreement is signed.
How long does it take to put a term sheet together?
Most deals reach heads of terms in two to four weeks once the headline price is agreed. From there, due diligence, drafting the definitive agreement and satisfying conditions typically take three to six months to signature — longer where Competition Commission approval is needed.
Does the buyer or the seller draft the first version?
Either can, and it is worth doing — whoever produces the first draft sets the starting position and the defaults the other side has to argue against. In practice the buyer, who is proposing the price and structure, often produces it first; sellers are entitled to insist on drafting it themselves, particularly where they are marketing the business through a broker.
Is a deposit paid at term sheet stage?
No, not usually. A term sheet records intention; money does not move until conditions are satisfied and the parties sign the definitive agreement and close. Where a deposit or a break fee is used on a deal, it is a term negotiated for that later stage, not something the term sheet itself pays.
Can we change the term sheet later?
The commercial terms can change — that is what due diligence and negotiation are for — but change them deliberately, in writing, not by drift. The whole process is built on the idea that everything after the term sheet is a retreat from it, never an advance on it, so a late change to price or structure needs a real reason, not just second thoughts.
Do I need a lawyer to draft or review a term sheet?
We would say yes — the line between binding and non-binding turns on precise wording, and it is easy to get wrong, sometimes binding you to the whole deal by accident. A short review confirms which clauses actually bind you and whether the “subject to contract” wording does what you think. We review term sheets and letters of intent on a fixed-fee basis, so you know the cost upfront.
Sources & authorities
- 1.Companies Act 71 of 2008 — ss 112 & 115 (special resolution to dispose of the greater part of assets or undertaking)
- 2.Competition Act 89 of 1998
- 3.Labour Relations Act 66 of 1995 — s 197 (automatic transfer on a business sale)
- 4.Insolvency Act 24 of 1936 — s 34 (advertised notice before disposing of a business)
- 5.Value-Added Tax Act 89 of 1991 — s 11(1)(e) (going-concern zero-rating)
- 6.CGEE Alsthom Equipments et Enterprises Electriques (SA Division) v GKN Sankey (Pty) Ltd (128/86) [1986] ZASCA 108 (AD)
- 7.Roazar CC v The Falls Supermarket CC (232/2017) [2017] ZASCA 166 (SCA)
- 8.Southernport Developments (Pty) Ltd v Transnet Ltd (440/03) [2004] ZASCA 94 (SCA)
- 9.Competition Commission — Merger thresholds and filing fees (effective 1 May 2026)
Every authority above was checked against its primary source in September 2026. This page is general information about South African law, not legal advice.
Free tool
Ready to put terms to the other side? Build your term sheet.
Eleven guided steps settle the price, how it is paid, the conditions, exclusivity, warranties and the restraint — as a PDF and an editable Word file, in about 15 minutes. Free, South African law.
Or read what a term sheet must settle first.
Articles 2–10 record intention. Article 11 binds.
Why you can trust this: Martin Kotze has been an admitted Attorney of the High Court of South Africa, registered Conveyancer, and Notary Public since 2014, practising from Pretoria. The firm is regulated by the Legal Practice Council under firm registration 17444.
This guide is general information, not legal advice for your specific matter.