Identify Counterparty Term Sheet Issues Scenario 02

Skill: Seller-Side Term Sheet Issue Identification

1. Subject-matter triage (only if applicable)

• This is a seller-side review of a buyer’s non-binding M&A term sheet, so the core task is issue spotting, severity ranking, and negotiation framing rather than definitive drafting.
• Separate binding from non-binding terms at the outset; binding process terms should be treated as immediate risk items even where the main economics are non-binding.
• If the source set contains more than one valuation input, market comp, or draft term-sheet variant, enumerate them first and analyze each against the same seller-side lens before synthesizing priorities.

2. Failure modes the skill is correcting

• Valuation issues are identified generically without anchoring them to the target’s financial performance or the market data in the record.
• The memo reads as a flat list of comments instead of a prioritized negotiation roadmap.
• Risk allocation is assessed in the abstract rather than against the specific deal profile, diligence facts, and other operative provisions.
• Exclusivity, no-shop, and process restrictions are flagged without testing duration, scope, and exceptions against the pace of the transaction.
• Binding provisions are overlooked or mislabeled, causing the memo to miss the terms that create immediate seller exposure.
• Issue statements stop at description and do not explain the concrete economic, operational, or transaction consequence for the seller.

3. Legal frameworks / domain conventions that apply

• Non-binding term sheets typically leave major economic and risk-allocation points open, but binding provisions still control the process and must be identified separately.
• Seller-side valuation analysis should be grounded in the target’s financial trajectory, quality of earnings, and any market comparables supplied in the source set.
• Working capital and purchase-price adjustment terms affect effective headline value and post-signing dispute risk; seller-favorable drafting reduces uncertainty in the normalization baseline and true-up mechanics.
• Indemnification terms are evaluated by basket, cap, survival, exclusions, and claim procedures; seller-favorable positions narrow post-closing exposure and limit open-ended claims.
• Earnout structures require special scrutiny for metric design, operational control, anti-manipulation protections, and dispute mechanics.
• Exclusivity and no-shop terms should be tailored to diligence and documentation needs; overbroad or extended lockups are seller-unfriendly in a competitive process.
• Broad representations and covenants often signal where definitive-agreement negotiations will become most contentious.

4. Analytical scaffolds

• Review the term sheet provision by provision from the seller’s perspective and separate headline economics, risk allocation, process mechanics, and drafting ambiguities.
• For each issue, state the provision, why it is problematic, and whether the problem is legal, economic, or process-driven.
• Tie valuation comments to the company’s financial data and tie risk-allocation comments to the market materials or diligence facts in the record.
• Where the source set contains multiple relevant figures, dates, or counterparties, identify them explicitly before comparing the term sheet to each.
• Treat every identified issue as incomplete unless it includes:
  • a scale reference drawn from the source documents;
  • the related clause, schedule, or document that interacts with it;
  • the downstream consequence to the seller.
• Distinguish drafting clarifications from substantive objections so the memo does not overstate minor language issues.
• Use a severity ladder consistently from top to bottom; apply the same scale to every issue and justify the rank in one line.

5. Vertical / structural / temporal relationships (only if applicable)

• Track how process terms constrain later stages of the deal: exclusivity, access rights, timing assumptions, and signing conditions can materially affect leverage before definitive documents are exchanged.
• Track how economics flow through the deal structure: purchase price, working capital adjustment, earnout, escrow, holdback, and indemnity cap should be assessed as a connected package, not as isolated provisions.
• Track which obligations survive signing and closing, and which are intended to be binding immediately versus only reflected in later definitive agreements.
• If multiple periods matter, compare the proposed duration of each restriction or exposure window against the expected signing-to-closing timeline and post-closing survival period.

6. Output structure conventions

• Deliver a single prioritized issues memo suitable for the seller side.
• Open with a short executive summary that states the overall deal posture and the few highest-priority objections.
• Define the severity scale once near the top and use it uniformly for every issue entry.
• Organize the body by priority tier, then by issue.
• For each issue, include:
  • the term or provision at issue;
  • the concern;
  • the recommended revision or counterproposal;
  • the basis in the source documents or market convention;
  • a short severity rationale;
  • the consequence if left unchanged.
• End with a concise Recommended Actions section that assigns each action to the appropriate role and ties it to a transaction milestone or immediate next step.
• Keep the tone commercial and practical; avoid restating the term sheet unless doing so advances the seller-side recommendation.