Seller Protections in Term Sheets: Key Provisions to Negotiate

Dinah Jantasz March 14, 2025

When selling shares or assets in a business, sellers often focus on securing a fair price and ensuring a smooth transaction. However, one crucial aspect that can be overlooked is the level of protection afforded to the seller within the term sheet. A well-drafted term sheet should not only set out the key commercial terms but also incorporate provisions that safeguard the seller’s position, reducing the risk of unnecessary exposure or deal failure. Below, we explore key seller protections that should be negotiated in a term sheet for asset and share sales.

Non-refundable deposit

A non-refundable deposit is a strong mechanism to ensure the buyer is genuinely committed to completing the transaction. This provision requires the buyer to pay a deposit upfront, which the seller retains if the deal does not complete due to the buyer’s default on or withdrawal from the transaction. Key considerations include:

the quantum of the deposit (typically between 5-10% of the purchase price);
the conditions under which the deposit is forfeited (e.g., failure to complete within a specified timeframe); and
whether the deposit is held in escrow or directly by the seller.

Exclusivity period with break fees

Sellers often grant buyers an exclusivity period, meaning they agree not to negotiate with other potential buyers while the buyer conducts due diligence checks on the business and negotiate final terms. To avoid wasted time and costs, sellers may want to negotiate an exclusivity break fee, ensuring compensation if the buyer withdraws without a valid reason. Important elements include:

defining what constitutes a valid reason for withdrawal;
setting a time limit to ensure the exclusivity period isn’t too long;
setting the break fee amount to reflect potential lost opportunities; and
ensuring the fee is properly enforceable.

Limitations on warranties and indemnities

Buyers typically seek extensive warranties (statements confirming key facts about the business, like its financial health) and indemnities (agreements where the seller covers specific risks, such as unpaid taxes). These can create financial risks for the seller so it is advisable to negotiate limitations to cap liability. Key protective measures include:

Monetary caps: a cap on liability, often linked to a percentage of the purchase price;
Time limits: restricting how long after completion claims can be made (e.g., 12-24 months for general warranties and longer for tax warranties);
Knowledge qualifiers: limiting warranties to the seller’s actual knowledge; and
Materiality thresholds: preventing claims below a certain financial threshold.

While the warranties would usually only become legally binding upon completion occurring and the purchase agreement being entered into, it is useful to introduce the limitations at the heads of terms stage for deal certainty.

Retention amounts and earn-out protections

Retention accounts (where part of the purchase price is held back for a set period) and earn-out structures (where the seller gets extra payments based on the business’s future performance) are often proposed by buyers as security against potential claims or to ensure agreed performance targets are met. Sellers should consider:

negotiating a cap on the retention amount (typically 5-15% of the purchase price);
clearly defining performance metrics in earn-out arrangements to avoid disputes; and
securing an independent mechanism for dispute resolution on earn-out payments.

Third-party consent and pre-completion conditions

Where third-party consents (e.g., consent of the landlord of a lease held by the company) are required, the term sheet should clearly allocate responsibility for obtaining them. Sellers should ensure that:

the burden of obtaining approvals is primarily on the buyer;
completion is not unduly delayed by consents that are outside the seller’s control; and
there is a long-stop date beyond which the seller can walk away without penalty.

Reverse break fees for buyer default

Similar to the non-refundable deposit, to deter buyers from unjustifiably pulling out, sellers should consider including a reverse break fee, payable by the buyer if they fail to complete without due cause. This serves as a financial deterrent and compensates the seller for wasted time and costs.

Confidentiality and non-solicitation protections

During the due diligence process, buyers gain access to sensitive business information. Sellers should ensure:

confidentiality provisions extend beyond completion or termination; and
a non-solicitation clause is included to prevent the buyer from poaching key employees or clients if the deal does not proceed.

Payment security mechanisms

To mitigate payment risk, sellers can negotiate various protections, including:

Escrow arrangements: a portion of the purchase price is set aside in a secure account and only released once the deal is completed. This ensures the seller gets paid;
Bank or parent company guarantees: a promise from a bank or the buyer’s parent company that the buyer will pay the agreed amount, giving the seller extra security; and
Deferred payment protections: if part of the payment is delayed, safeguards are put in place to make sure the seller still gets their money, such as requiring the buyer to provide financial backing.

While a term sheet is typically non-binding, its provisions set the foundation for the transaction and establish key protections for the seller. By negotiating seller protections, such as non-refundable deposits, break fees and liability limitations, sellers can significantly reduce their risk exposure and enhance deal certainty.

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This article is intended for general information only, applies to the law at the time of publication, is not specific to the facts of your case and is not intended to be a replacement for legal advice. It is recommended that specific professional advice is sought before relying on any of the information given. © Jonathan Lea Limited.