A term sheet sets out the terms a lender expects to offer if diligence confirms what the buyer has told it: amount, pricing, maturity, amortization, collateral, covenants and fees. It is not an approval, and almost none of it binds the lender. A commitment letter comes after diligence and credit approval. It binds the lender to lend on stated terms, subject to a list of closing conditions and an expiry date. In an acquisition, only a signed commitment with conditions the buyer can actually satisfy should be relied on for the purchase agreement's financing timing.
- Indicative terms
- A read on size and structure from summary figures; binds no one
- Term sheet
- Proposed terms, subject to diligence and credit approval; an invitation to underwrite
- Commitment letter
- Credit-approved terms the lender agrees to fund, subject to listed conditions
- What survives to closing
- Conditions precedent: equity funded, liens released, legal documents, no material adverse change
- What to tie the purchase agreement to
- The commitment, with an outside date that allows for its conditions
Three documents, three levels of promise
Lenders speak in stages, and each uses words that sound firmer than they are. Before seeing the full file, a lender may give indicative terms: a likely size, structure and price from summary figures. After reviewing a package and deciding the deal fits, it issues a term sheet, sometimes called a proposal letter or letter of interest. After diligence, third-party reports and credit committee, it issues a commitment letter, and the credit agreement follows.
| Stage | What the lender has done | What it binds the lender to | What it usually asks of the buyer |
|---|---|---|---|
| Indicative terms | Read summary figures and the deal outline | Nothing | Nothing, beyond the information needed to give a view |
| Term sheet | Reviewed the package; the deal team believes it can get approval | Usually only confidentiality and, sometimes, exclusivity; the terms themselves are non-binding | A signature, often an expense deposit for diligence costs, and sometimes a period of exclusivity |
| Commitment letter | Completed diligence and taken the deal through credit approval | To lend on the stated terms if the conditions are met before the expiry date | Acceptance by a deadline, and often a commitment fee |
| Credit agreement and closing | Drafted the credit agreement, security documents and any guarantees | To fund at closing once every condition is satisfied | Signatures, equity funded, and the closing deliverables |
Why a term sheet is an invitation to underwrite
The conditions paragraph of an acquisition term sheet says the terms are subject to some version of: satisfactory business, legal and financial diligence, a quality of earnings review, a field exam and inventory appraisal on an asset-based loan, review of the purchase agreement, verification of the equity, no material adverse change, and final credit approval. Each item is a door the lender can close. Final credit approval alone means the people who actually decide have not yet signed off.
That is not a flaw. A lender cannot commit before it has verified the earnings it is lending against, and a lender that commits without looking will look later and re-trade. The term sheet's job is to agree the shape of the loan before either side spends real money on diligence: amount, pricing, maturity and amortization, collateral, covenants, call protection and fees.
The practical consequence is that the terms most likely to move after a term sheet are the ones that depend on what diligence finds. If the quality of earnings takes adjusted EBITDA down, the loan comes down with it, because leverage and coverage are computed on the verified figure. If a key customer turns out to be a larger share of revenue than the teaser suggested, the lender may tighten a covenant, lower the amount or ask for more equity. If the field exam finds more ineligible receivables than expected, the borrowing base shrinks.
A term sheet tells you what the loan will look like if the lender's diligence confirms your numbers. It tells you nothing about whether it will.
What a commitment letter adds, and the conditions that remain
A commitment letter is issued after credit approval. It restates the terms, now approved, and lists the conditions precedent that must be satisfied before the lender funds. It also carries an expiry date: if the loan has not closed by then, the commitment lapses unless the lender extends it. The difference from a term sheet is that the open questions have moved from whether the lender wants the deal to whether the closing deliverables arrive.
Conditions precedent in an acquisition commitment usually fall into three groups. Some are mechanical and within the buyer's control. Some depend on third parties. A few remain matters of lender judgement, and those are the ones to read closely.
| Condition | Who controls it | What to watch |
|---|---|---|
| Executed purchase agreement consistent with the terms reviewed | Buyer and seller | Late changes to price, structure or seller financing may need the lender's consent |
| Equity funded in the amount committed | Buyer or sponsor | The source must be documented, and rollover terms must match what the lender approved |
| Payoff letters and lien releases for the target's debt | Seller and its lenders | An unexpected filing can hold the closing; see paying off the target's debt at closing |
| Subordination agreement signed by the seller | Seller | A seller who first sees the lender's form at closing may push back; see seller note subordination terms |
| Landlord waivers, consents from key counterparties | Third parties | Landlords and customers set their own timetable |
| Minimum EBITDA or maximum leverage at closing | The business's recent results | A soft quarter between commitment and closing can breach it |
| No material adverse change | Lender judgement | Broadly drafted, this lets a lender walk if trading deteriorates before closing |
| Documents satisfactory to the lender | Lender and counsel | Should refer to documents consistent with the commitment, not open-ended discretion |
Two kinds of language weaken a commitment back toward a term sheet: a surviving credit condition, such as subject to final credit approval, which means underwriting is not finished; and a broad material adverse change clause that lets the lender decide, in its discretion, that the business has changed. Some private credit commitments also carry market flex, which lets the lender adjust pricing or structure within stated limits if it cannot syndicate the loan. Know which of these your commitment contains before signing a purchase agreement that depends on it.
Conditionality in competitive deals
In a competitive sale, sellers compare bids partly on how certain the financing is. Sponsor-backed buyers in auctions often ask lenders for commitments with limited conditionality, where the conditions to funding are narrowed to a short list of specified items and the lender cannot walk for reasons that are not on it. Not every lender offers this, and fewer do at the smaller end of the lower middle market, but a buyer who can show a seller a commitment with few judgement-based conditions has a stronger bid than one waving a term sheet.
The trade-off is that a lender giving more certainty wants more information first, and more protection in the pricing and fees. Whether it is worth asking for depends on how competitive the process is and how much the seller cares about certainty against price.
Deposits and fees at each stage
Lender costs usually arise at three points, and it is worth knowing what each payment buys.
- At the term sheet: many lenders ask for an expense deposit. It usually funds third-party diligence such as legal review, a field exam on an asset-based loan, or the lender's own accounting work. Ask whether unused amounts are refunded if the lender declines.
- At the commitment: lenders often charge a commitment fee on acceptance, sometimes payable only at closing and sometimes earned when the letter is signed. Read whether it is refundable if the lender, rather than the buyer, fails to close.
- At closing: upfront fees, often netted from loan proceeds, and the lender's legal costs, which the borrower customarily pays.
- After closing: unused line fees on the revolver and, on many term loans, call protection if the loan is repaid early; see prepayment penalties and call protection.
Midas Partners agrees its fee with the client in writing before anything goes to a lender.
Timing the purchase agreement to the right document
The expensive mistake is a purchase agreement whose financing condition or outside date is keyed to a term sheet. The buyer's deposit or break fee may be at risk on a timetable that assumes the lender has decided; if diligence then cuts the loan, the buyer must fill the gap, renegotiate, or walk away at a cost.
A buyer-protective approach ties three things together. The letter of intent should anticipate that financing is subject to a commitment on terms at least as good as a stated amount and structure; see the financing contingency in an LOI. The purchase agreement's financing condition should be satisfied by a signed commitment, not a term sheet, and should allow for the commitment's own conditions. And the outside date should leave room for the conditions a third party controls, with an extension if the lender is still working.
Keeping more than one lender engaged until a commitment is signed is ordinary practice, not disloyalty. Where a term sheet asks for exclusivity, a short period tied to the delivery of a commitment is reasonable; an open-ended one is not. The full sequence from package to closing is in the acquisition financing process, step by step.
Getting to a firmer term sheet sooner
The distance between a term sheet and a commitment is mostly made of questions the lender could not answer from what it was given: how adjusted EBITDA was built, whether the statements tie to the returns, what the target owes, where the equity comes from and on what terms the seller's paper sits. Answer those in the first submission and the term sheet carries fewer open conditions, and fewer surprises follow it.
Once a borrower's documents are in, Midas Partners builds the financing model, lender presentation, blind teaser and underwriting memo in a day; built by hand the same package takes at least a week. Lenders that fit see the blind teaser first, and the client approves each one by name before it learns who the client is, so the buyer compares term sheets from several lenders working on the same facts. See the package and how we underwrite.
Common questions
- Is a commitment letter legally binding on the lender?
- It binds the lender to lend on the stated terms if the listed conditions are satisfied before the expiry date. How firm it is depends on those conditions: a commitment still subject to credit approval or a broadly drafted material adverse change clause is weaker than one with only closing deliverables left.
- Can the loan amount change after the term sheet?
- Yes, and it often does when diligence changes the earnings the loan is sized on. A lower adjusted EBITDA from the quality of earnings, a smaller borrowing base after a field exam, or a newly found debt can each reduce the amount.
- What happens if the commitment expires before closing?
- The lender is no longer bound. Lenders often extend a commitment for a deal that is progressing, sometimes asking for updated figures, but it is their choice.
- Should I sign a purchase agreement after the term sheet?
- Buyers often sign once they have a term sheet they are comfortable with, but the financing condition in the purchase agreement should be satisfied by a signed commitment, not the term sheet, with an outside date that allows for the commitment's conditions.
- Is the expense deposit refundable?
- It depends on the term sheet. Deposits usually fund third-party diligence; amounts already spent are rarely returned, but unused amounts often are. Ask before signing.