Both are pre-contract instruments used to document commercial alignment before a binding agreement is signed. This article covers what each document contains, how their legal status works, when to use one over the other, and what follows once either is signed.

What Is a Term Sheet?

A term sheet is a pre-contract document that records the key commercial terms of a proposed transaction. It is used primarily in investment rounds, M&A deals, and joint ventures to align both parties on the core terms before a definitive agreement is drafted.

A term sheet covers valuation or purchase price, deal structure, equity split, governance rights, conditions precedent, the transaction timeline, and provisions for exclusivity and confidentiality. In the UK and Europe, the same document is commonly referred to as heads of terms. The name varies by jurisdiction; the function is the same.

The primary purpose of a term sheet is to reduce the cost of contract negotiation. When both parties agree on the commercial terms upfront, drafting the definitive agreement becomes faster and less contentious. Signing a term sheet is not a commitment to the transaction; it is a commitment to negotiate within an agreed commercial framework.

What Is a Letter of Intent?

A letter of intent is a document that formally expresses one party’s intention to proceed with a transaction on the terms outlined within it. Its purpose is to signal serious commitment and provide a structured framework for negotiations without the commercial detail of a full term sheet.

Letters of intent are used across corporate acquisitions, commercial partnerships, real estate transactions, and supplier agreements. In the UK and Australia, the equivalent document is a heads of agreement, which is a near-synonym with the same function. Letters of intent apply more broadly than term sheets, which are concentrated in investment and M&A contexts.

[QtA: What is a memorandum of understanding vs a letter of intent?]
A memorandum of understanding is a broader document that records areas of agreement before formal commercial terms have been settled. An LOI is more transactional in tone and signals a closer-to-final position on key deal parameters. In practice, both terms are often used interchangeably, though an MOU typically carries less commercial specificity.

Term Sheet vs Letter of Intent: Core Differences

Both documents serve the same broad function: recording commercial intent before a binding agreement is signed. Where they differ is in the level of detail, the industry contexts where each is standard, and how much commercial specificity the parties have reached before signing.

The most practical way to read these differences is through the lens of deal complexity. A term sheet suits transactions with many commercial variables. A letter of intent fits situations where broad intent is enough to progress. The types of contracts a transaction will ultimately produce determine how much pre-contract detail is warranted before formal drafting begins.

Are Term Sheets and Letters of Intent Legally Binding?

A term sheet is not legally binding in most cases. Its function is to record commercial intent and align the parties on deal terms, not to create enforceable obligations. The document includes an explicit non-binding disclaimer to confirm this status before signature.

A letter of intent is not legally binding as a whole, but specific provisions within it can be enforceable. Confidentiality and exclusivity clauses are routinely carved out as binding within an otherwise non-binding document. A no-shop clause is an exclusivity provision that prevents one party from seeking competing offers during the agreed negotiation period; these carve-outs remain enforceable even when the wider document is not.

Poorly drafted term sheets and LOIs can contain accidental binding language. If a document describes obligations as “agreed” or “final” without a non-binding disclaimer, courts may treat those terms as enforceable. Both documents should carry an explicit non-binding statement and receive legal review before signature.

When to Use a Term Sheet vs a Letter of Intent

A term sheet is best suited to transactions with multiple complex commercial variables, where aligning on specific terms upfront reduces the cost of negotiating the definitive agreement. Venture capital rounds, private equity acquisitions, and joint ventures are the contexts where this level of pre-contract detail is expected.

A letter of intent is the better choice for simpler transactions where stating intent is enough to move forward. Commercial partnerships, supplier agreements, and real estate deals are all contexts where LOIs are standard practice. For these transactions, the structured commercial detail of a term sheet would be disproportionate.

The deciding factor is deal complexity. When a transaction involves governance rights, drag-along provisions, or valuation structures that require explicit pre-contract agreement, a term sheet is appropriate. When the goal is to signal intent and agree on broad parameters, an LOI is sufficient. Legal review is recommended before either document is signed.

What Comes After a Term Sheet or Letter of Intent?

After a term sheet or letter of intent is signed, the parties proceed to due diligence. The buyer or investor verifies the other party’s financial position, legal standing, and operational claims. This stage includes contract review of existing agreements, and the LOI or term sheet defines the scope and timeline of this investigation period.

If due diligence is satisfactory, the parties negotiate and sign a definitive agreement. This binding contract governs the transaction and supersedes both the term sheet and the LOI in its entirety. Executing the contract requires all parties to agree on the final terms, obtain any required internal approvals, and sign in the legally prescribed form.

Once the definitive agreement is signed, the post-signature phase begins. This is where contract lifecycle management becomes relevant: obligation tracking, renewal monitoring, and compliance with the terms both parties have committed to. Miramis is a contract lifecycle management platform built to manage this phase across the full contract portfolio.

Manage What Comes After the Deal Closes

Once a term sheet or letter of intent leads to a signed agreement, the contract needs to be tracked, managed, and monitored throughout its life. Miramis gives legal, procurement, and finance teams a single platform to store contracts, track obligations and renewals, and maintain audit readiness without manual effort. See Miramis in action.