Term sheet vs LOI is treated by most operators as a semantic distinction. It is not. It is a structural decision that determines how much leverage the founder retains through diligence, how exposed the deal is to post-LOI repricing, and how a working capital peg is set, contested, and resolved.
The choice between a term sheet and a letter of intent shapes 35 to 55 percent of post-LOI value movement on lower-middle-market transactions. Across the $20M to $100M operator tier, 60 to 75 percent of first-time sellers sign an LOI that contains structural concessions they did not recognize as concessions. The cost of those concessions is read at closing.
A term sheet is a high-level outline of commercial terms, typically 2 to 5 pages, non-binding except for limited provisions such as confidentiality and sometimes exclusivity. It is used to test alignment before legal investment, and it is preferred when the operator has multiple interested parties and wants to maintain competitive tension. A letter of intent is a more detailed document, typically 5 to 15 pages, often including exclusivity or no-shop clauses, longer in duration at 45 to 90 days standard with a 60-day median, and frequently including preliminary working capital adjustment language, earn-out architecture, and indemnification framing. The LOI carries higher commitment and narrower optionality, but it accelerates the buyer's investment in diligence. The distinction is structural, and it determines how much enterprise value the operator carries from signing to close.
The term sheet and the LOI diverge across eight structural dimensions. The LOI is where 70 to 85 percent of subsequent post-LOI repricing causes are seeded. Select a dimension to compare how each document treats it and why the difference matters.
Usually binding only on confidentiality. The commercial terms are an outline tested for alignment, not a commitment.
Confidentiality plus exclusivity, and often deal-protection clauses. The document carries enforceable obligations beyond the headline price.
The binding scope sets how much the document commits the operator before diligence has confirmed anything. The wider the binding scope, the earlier leverage transfers to the buyer.
Five repricing causes originate in LOI language. Each is seeded at signing and harvested through diligence, when exclusivity has already removed the operator's competing leverage.
If the LOI specifies a trailing twelve months average without a seasonality adjustment, the peg can move 15 to 30 percent against the operator.
Undefined add-back treatment in the LOI drives 8 to 18 percent repricing as diligence applies the buyer's reading of the bridge.
Caps set below 10 percent of enterprise value transfer post-close risk back to the seller, repriced as the protection the buyer demands.
Broad MAC language gives the buyer a renegotiation lever that converts ordinary diligence findings into price movement.
Earn-outs negotiated late in the LOI typically capture 20 to 35 percent of purchase price and condition it on metrics the seller cannot fully control.
Working capital peg negotiation must begin before the LOI is signed, not after. The working capital peg is the single LOI term with the largest effect on final value, and each methodology can produce a peg 20 to 40 percent different from the next.
An un-optimized LOI exposes the operator in sequence: the LOI sets the methodology, then diligence applies the methodology, then closing tests against the methodology. If the operator signs an LOI that specifies TTM average on a seasonal business, the peg will be wrong at closing and the buyer will hold the leverage to recalibrate. The defense is to quantify the peg with the Working Capital Peg Calculator before the methodology is conceded.
The trailing twelve months average. Simple to compute and the most common LOI default, but blind to seasonality.
The trailing six months average. More current, but exposed to whichever half of the year it captures.
The trailing twelve months adjusted for documented seasonality. Defensible on a cyclical business, but only if the seasonality is evidenced before the LOI.
A normalized figure that removes non-operating and one-time items. The most defensible methodology, and the one that requires the most preparation.
Once an LOI is signed with a 60-day no-shop, the operator has no competing offer to validate price. Every diligence finding becomes a renegotiation lever for the buyer. The operator's only options become accepting the renegotiation or walking with sunk legal and diligence costs and a market that has gone stale. This is the structural cost of exclusivity, and it is why the same diligence finding produces a different outcome before and after the no-shop is granted.
Operators should never grant exclusivity without four conditions in place: a defended price floor, a defined working capital peg methodology, a documented EBITDA bridge, and a diligence response framework already prepared. The opening window of diligence reads each of these directly, and operator concentration is read alongside them through the Founder Dependency Index.
Each discipline anchors to a TEOL framework or tool, and each is constructed before the LOI exists rather than negotiated under its pressure.
The peg drives 35 to 55 percent of post-LOI value movement. It must be quantified before the methodology is conceded, not after.
An undefined bridge invites 8 to 18 percent repricing. A documented bridge defines the number diligence will reference.
Caps below 10 percent of enterprise value transfer risk back to the seller. The boundaries are set in the LOI and hard to widen later.
Milestone-based exclusivity keeps the no-shop accountable to progress rather than handing the buyer an open-ended window.
Narrow material adverse change language with explicit carve-outs removes the broad renegotiation lever the buyer would otherwise hold.
The Sale Readiness Index examines LOI preparation. The QofE Pre-Read defines the EBITDA bridge the LOI will reference, and the EBITDA Quality Calculator models the reported-to-defensible gap that the LOI add-back language will either protect or expose. The Capital Readiness Scorecard and the Financial Truth Ladder read the underlying readiness the LOI negotiation depends on.
Term sheet vs LOI is not a vocabulary question. It is a structural decision that determines how much enterprise value the operator carries from signing to closing. The LOI is where post-LOI repricing causes are seeded, where the working capital peg either becomes leverage or becomes liability, and where exclusivity either accelerates a clean process or compresses the founder into a single buyer's reading of the business. The operators who treat the LOI as architecture, not as paperwork, defend 35 to 55 percent of the value movement that lower-middle-market transactions surrender between LOI and close. The peg, the bridge, the diligence response framework, and the deal protection language are constructed in advance through pre-transaction finance preparation and held through diligence defense and response. Then the LOI is negotiated from preparation, not from pressure. Begin in the Operating Library.
The peg, the bridge, the diligence framework, and the deal protection language are built before the LOI exists. Begin with the diagnostic, or open the preparation engagement.