Small Business Sale Term Sheet Template: The 11 Clauses That Matter (2026)

This small business sale term sheet template walks through the 11 standard clauses an owner of a Main Street business under $5M in deal value should have on paper before signing a definitive purchase agreement. According to the BizBuySell 2026 Insight Report, the median small business sale closes 187 days after the term sheet is signed, and roughly one in three deals that fall apart die during this window because the term sheet was either too vague to enforce or too aggressive to honor. The template below is built for that reality.

What This Actually Means

A term sheet is a non-binding (with a few binding carve-outs) one to four page document that locks in the major economic and structural points of a business sale before the parties spend money on definitive documents, quality of earnings, and legal due diligence. For deals under $5M, the term sheet is typically signed between the individual buyer (or small search-fund acquirer) and the seller, then becomes the blueprint that the purchase agreement is drafted against.

The small business term sheet is not the same animal as the corporate M&A term sheet you see in mid-market private equity transactions. It is shorter, it almost never contains a Material Adverse Change (MAC) clause, it does not address syndication or co-investor rights, and it gives the seller far less room to renegotiate after signing. It is also distinct from a Letter of Intent (LOI). The LOI is broader in tone and is often used to open negotiations. The term sheet is tighter, more numerical, and is the document that gets used as a checklist during diligence and drafting. Many small deals fold the two into a single document called an “LOI / term sheet,” which is acceptable as long as the eleven items below are all present.

The Small Business Administration’s SOP 50 10 8, which governs SBA 7(a) financed acquisitions, requires the lender to review the signed term sheet (or LOI) before issuing a commitment letter. That means if the buyer is using SBA financing, the term sheet has to survive bank scrutiny, and certain items (seller note standby periods, working capital targets, escrow mechanics) are functionally non-negotiable.

The 11 Clauses You Need to Understand

1. Parties and Transaction Structure (Asset vs. Stock)

Current state: The opening paragraph names the legal entity selling, the buyer (or buyer’s newco LLC), and declares whether the transaction is an asset sale or a stock sale. For Main Street deals, roughly 95% of transactions close as asset sales according to IBBA 2026 Market Pulse Report data, because asset sales give the buyer a stepped-up tax basis and shield the buyer from the seller’s pre-close liabilities.

Target state: The term sheet should specify: (a) the exact selling entity, (b) the buying entity (often a newly formed LLC the buyer will set up post-LOI), (c) “asset purchase” or “stock purchase,” and (d) which assets are included or excluded. Standard exclusions for asset sales: cash, accounts receivable older than 90 days, the seller’s personal vehicle, and any real estate (which is typically handled as a separate lease or purchase).

Impact: Asset sales typically generate a higher tax bill for the seller (ordinary income on equipment depreciation recapture, capital gains on goodwill) and a lower tax bill for the buyer. Stock sales reverse that. A seller who insists on a stock sale should expect the buyer to discount the offer by 10% to 18% to compensate for lost tax shield, per M&A Source 2025 small-deal benchmarks.

2. Purchase Price and Payment Terms

Current state: The headline number gets all the attention, but the structure underneath determines whether the seller actually receives the headline number. Per the BizBuySell 2026 Insight Report, the median sub-$5M deal in 2026 is structured as 73% cash at close, 18% seller financing, and 9% earnout or rollover equity.

Target state: A clean term sheet breaks the purchase price into named buckets with dollar figures, not percentages. Example: “Total Consideration: $1,500,000. Cash at Close: $1,095,000. Seller Note: $270,000. Earnout: $135,000.” Each bucket then gets its own sub-section detailing terms.

Impact: A 5% shift between cash-at-close and seller note can be the difference between the seller paying off their own debt at the closing table and carrying paper for five years. Negotiating this single line is usually the highest-dollar item in the entire term sheet.

3. Seller Note Terms

Current state: SBA 7(a) financed deals almost always require the seller to carry a note for some portion of the price. SBA SOP 50 10 8 requires this seller note to be on “full standby” (no principal or interest paid) for the first 24 months if the note is counted toward the buyer’s equity injection.

Target state: The term sheet should state: principal amount, interest rate (typically Prime + 2% for non-standby seller notes, or a fixed rate of 6% to 9%), amortization period (usually 5 to 10 years), whether standby applies and for how long, whether the note is secured or unsecured, and what events trigger acceleration (typically buyer default on the senior loan).

Impact: Most small business sellers do not understand that a 10-year amortized seller note at 7% on $300,000 means they collect a check for around $3,480 a month for ten years and have to chase the buyer if they stop paying. A short-amortization note (5 years, balloon at year 7) is dramatically better for the seller’s cash position.

4. Earnout Structure (If Applicable)

Current state: Earnouts appear in roughly 28% of sub-$5M deals according to IBBA 2026 data, almost always when the buyer and seller cannot agree on valuation. The classic structure is “X% of EBITDA above the trailing twelve months baseline for two to three years.”

Target state: The term sheet should specify the metric (EBITDA, revenue, gross profit), the measurement period, the threshold above which earnout is earned, the percentage paid, the cap, and the calculation methodology (who calculates, what add-backs are allowed, dispute resolution). A clean earnout clause names a single accounting firm to break ties.

Impact: The buyer controls the business post-close. Per M&A Source data, roughly 47% of earnouts pay zero, and a meaningful share end up in litigation when the buyer reclassifies expenses or makes “strategic investments” that crater EBITDA. The seller’s protection is in writing the metric tightly in the term sheet.

5. Working Capital Adjustment

Current state: The buyer expects to receive a business with a normal level of working capital (cash, receivables, and inventory net of payables) on the closing date. The term sheet sets a target working capital, and the purchase price gets adjusted dollar for dollar above or below that target on the closing balance sheet.

Target state: The term sheet should state: target working capital amount (typically the trailing-12-month average of current assets minus current liabilities, excluding cash and debt), the definition of working capital line items, a true-up period (60 to 90 days post-close), and the dispute mechanism.

Impact: Working capital pegs can move the final price by $50,000 to $150,000 on a $1.5M deal. A seller who has not run the trailing-12-month calculation before signing the term sheet is signing blind.

6. Escrow / Holdback

Current state: The buyer holds back a portion of the purchase price in escrow to cover potential indemnification claims, working capital trueups, and undisclosed liabilities. Per ABA M&A Committee model term sheet guidance simplified for small deals, the standard escrow for sub-$5M transactions is 5% to 10% of purchase price held for 12 to 18 months.

Target state: The term sheet should state: escrow percentage, escrow amount in dollars, release schedule (lump sum at 12 or 18 months, or staged releases), escrow agent (often the closing attorney’s trust account for small deals to avoid escrow fees), and the conditions under which the buyer may make a claim against the escrow.

Impact: A 10% escrow on a $1.5M deal is $150,000 the seller does not see for a year and a half. Negotiating this down to 5% or shortening the release window is often easier than negotiating up the headline price.

7. Representations, Warranties, and Indemnification

Current state: The seller makes representations about the business (financial statements are accurate, taxes are paid, no pending litigation, no environmental contamination, all material contracts are disclosed) and indemnifies the buyer if those reps turn out to be wrong.

Target state: The term sheet should specify: scope of representations (general business reps vs. fundamental reps like title and authority), survival period (typically 18 to 24 months for general reps, indefinite or longer for fundamental reps and tax), indemnification cap (typically 10% to 25% of purchase price for general reps, 100% for fundamental reps), and basket / deductible (claims under $25,000 are typically excluded, and a deductible of 0.5% to 1% of price often applies before any claim can be made).

Impact: Without a cap and a basket, the seller is theoretically on the hook for the full purchase price for years. A reasonable structure for a $1.5M deal: 15% cap ($225,000), $15,000 basket, 18-month survival.

8. Restrictive Covenants (Non-Compete and Non-Solicit)

Current state: Buyers will insist on a non-compete and non-solicit from the seller. For small business deals, this is often the second-largest negotiation point after price.

Target state: The term sheet should specify: geographic radius (typically 25 to 50 miles for a local service business, statewide for a regional business), duration (typically 3 to 5 years), scope of restricted activity (same line of business, not “anything related to business”), and a non-solicit on customers and employees (typically matches the non-compete duration).

Impact: Per ABA M&A Committee guidance, non-competes longer than 5 years or broader than the actual service area are often unenforceable in court, but the seller still has to litigate to prove that. A 3-year, 35-mile non-compete is enforceable in nearly every state and is the realistic target for a small business sale.

9. Employment / Consulting Agreements for the Seller

Current state: Most buyers want the seller to stay on for a transition period. Per IBBA 2026 data, the median post-close seller engagement for sub-$5M deals is 6 months at part-time hours.

Target state: The term sheet should specify: role (consultant vs. employee, with employee status triggering payroll tax and benefits), duration, hours per week, compensation (often $0 if baked into the purchase price for the first 90 days, then $75 to $200 per hour after), and termination rights for both sides.

Impact: A seller who agrees to a vague “reasonable transition assistance” clause without dollar figures and hour caps often ends up working full-time for free for a year. Specificity in the term sheet prevents this.

10. Due Diligence Period and Exclusivity

Current state: The buyer needs time to conduct financial, legal, operational, and (for SBA deals) lender diligence. The seller agrees not to negotiate with other buyers during this window in exchange for the buyer committing money to diligence costs.

Target state: For small deals, due diligence is typically 45 to 60 days from term sheet signing, with exclusivity matching the diligence period or extending 15 to 30 days past it to cover the closing window. The term sheet should specify: diligence period start and end dates, scope of access (financials, contracts, employee files, customer lists, physical premises), exclusivity period, and whether exclusivity can be extended (typically only by mutual written agreement).

Impact: A 90-day exclusivity for a deal that should close in 60 days takes the seller off the market for an extra month if the buyer stalls. Tying exclusivity tightly to the diligence period is the seller’s protection against buyer slow-walking.

11. Closing Conditions and Break Fees

Current state: The term sheet lists the conditions that must be satisfied before either party is obligated to close. For SBA-financed deals, the top condition is the buyer receiving a final SBA commitment letter on terms acceptable to the buyer.

Target state: The term sheet should list: (a) closing conditions (SBA financing committed, no material adverse change in the business, satisfactory completion of diligence, third-party consents on key contracts and leases obtained, definitive agreements signed), (b) the binding break fee or deposit (typically $5,000 to $25,000 for a sub-$5M deal, refundable to the buyer if the seller breaches and forfeited to the seller if the buyer walks without cause), and (c) the target closing date.

Impact: Most small business term sheets omit the break fee entirely, which means a buyer can walk for any reason on day 89 and the seller has spent three months and a few thousand dollars on attorneys with nothing to show. A modest break fee aligns incentives.

Worked Example: $1.5M Plumbing Business Sale to an SBA Buyer

To make the template concrete, here is a complete term sheet for a fictional but realistic transaction: Acme Plumbing LLC, a 22-year-old Indianapolis-area residential plumbing company with $1.5M trailing-12 revenue, $380,000 SDE, three trucks, and four employees. The seller is a 61-year-old owner-operator looking to retire. The buyer is an individual using SBA 7(a) financing.

On a $1,500,000 headline price, the seller’s actual cash at the closing table is $1,095,000 minus closing costs of roughly $30,000 (legal, broker if any, transfer taxes), minus the working capital adjustment if the closing balance sheet runs short of the $95,000 target. The seller carries the $270,000 note for 10 years (collecting roughly $3,135 per month after the 24-month standby ends), and may or may not see any of the $135,000 earnout. The $112,500 in escrow gets released over 18 months assuming no claims.

This structure is realistic, SBA-financeable, and protects both parties. The same business sold without these protections (no escrow, no basket, no break fee, vague non-compete) is the kind of deal that ends up in arbitration two years later.

How This Differs From an LOI and From Corporate M&A Term Sheets

The Letter of Intent and the term sheet overlap, but they are not the same. A Letter of Intent is generally broader, written in prose, and used to open the conversation. It often contains all the elements above but at a higher level of abstraction (for example, “the parties contemplate a typical escrow” instead of “$112,500 escrow released in two tranches”). The term sheet is the more numerical and structural document, often presented as a table. For a deeper walkthrough of LOI structure, see our Letter of Intent to Sell Business sample guide and the broader Letter of Intent in M&A reference.

Compared to a corporate M&A term sheet (the kind used in $50M-plus private equity transactions), the small business sale term sheet is dramatically simpler. It does not contain a Material Adverse Change (MAC) clause that lets the buyer walk if the business “materially adversely changes” between signing and closing, because for small deals the closing happens too fast for a MAC to be meaningful and the SBA lender already controls that risk through its underwriting. It does not address syndication, co-investor rights, board seats, drag-along or tag-along, founder vesting, or option pool top-ups, because there are no co-investors and the buyer is buying 100%. It does not include a “go-shop” period because the seller usually does not have the bargaining power to demand one. And it almost always omits the formal “no-shop” carve-out for unsolicited superior proposals, because in a small deal exclusivity is exclusivity.

The simplicity is the feature, not a bug. A small business sale term sheet that runs more than four pages is almost always over-engineered for the deal size, and over-engineering kills small deals.

Common Mistakes

Treating the Term Sheet as Non-Binding Across the Board

The term sheet says “non-binding” at the top, but exclusivity, confidentiality, expense reimbursement, and break fees are almost always binding even when the economic terms are not. A seller who treats the entire document as non-binding and talks to another buyer during exclusivity is exposed to a breach claim. Read the binding carve-outs carefully.

Signing Before Running the Working Capital Calculation

The single most expensive mistake on small deals is agreeing to a working capital target without first calculating the trailing-12-month average. A seller who agrees to “normalized working capital” without a number ends up arguing the number for 75 days after closing, often with $50,000 to $100,000 at stake.

Accepting a Vague Earnout

“25% of EBITDA growth over baseline” sounds clean until the buyer adds back $200,000 in “transition expenses” that crater EBITDA. The earnout clause has to name the add-back rules (or the absence of add-backs), the auditor, and the dispute mechanism, or it is functionally worthless to the seller.

Ignoring the SBA Standby Requirement

If the buyer is using SBA 7(a) financing and the seller note is part of the equity injection, the seller is on full standby for 24 months. Some sellers do not discover this until the bank’s commitment letter shows up, by which point they have already spent the proceeds in their head. Confirm SBA financing structure before signing the term sheet, not after.

No Break Fee

A term sheet without a break fee is an invitation for the buyer to use the seller’s diligence period as a free option. A modest $10,000 to $25,000 break fee is standard, enforceable, and aligns incentives without scaring off legitimate buyers.

Letting Exclusivity Run Longer Than Diligence

Exclusivity that runs 30 days past the diligence period gives the buyer a month of free optionality. Tying exclusivity tightly to the diligence end date (with extensions only by mutual written agreement) is the seller’s protection.

Timeline: From First Draft to Definitive Agreement

1. Day 0: Buyer submits a written offer, often as a one-page LOI or “indication of interest.” Seller (or seller’s advisor) responds with a counter-term-sheet that puts the 11 clauses above on paper with specific numbers.
2. Days 1 to 14: Negotiation. Two to four rounds of redlines on price, seller note, escrow, non-compete, and earnout. The seller and buyer should each have an M&A attorney reviewing redlines.
3. Day 14 to 21: Term sheet signed. Exclusivity and binding carve-outs become effective. Buyer pays diligence retainer (if any) and engages QofE provider.
4. Days 21 to 75: Due diligence. Buyer’s QofE provider tests financials, attorney reviews contracts, SBA lender underwrites, seller’s attorney drafts the definitive purchase agreement using the term sheet as the blueprint.
5. Days 75 to 90: Definitive agreement signed. Closing checklist completed. Funds wired. Keys handed over.

This is the standard timeline. Deals that take longer typically failed to address an item on the term sheet (vague working capital target, ambiguous earnout, missing seller note terms) and are now relitigating the basics inside the definitive agreement. Deals that close faster usually had a buyer with cash and no third-party financing.

Frequently Asked Questions

Is a small business sale term sheet legally binding?

Most of it is not binding, but specific sections almost always are. Confidentiality, exclusivity, expense responsibility, break fee, and the obligation to negotiate in good faith are typically binding even when the economic terms (price, structure, payment) are not. Read the “binding provisions” carve-out at the bottom of the term sheet carefully, because that is the section a court will enforce if either party walks.

How long should a small business sale term sheet be?

Two to four pages is the sweet spot for sub-$5M deals. Anything shorter than two pages is probably missing one of the 11 clauses. Anything longer than four pages is usually over-engineered with mid-market provisions that do not apply (MAC clauses, syndication rights, drag-along provisions) and will slow the deal down without adding protection.

Who drafts the term sheet, the buyer or the seller?

The buyer typically drafts the first version because the buyer is making the offer. The seller (or seller’s M&A advisor) then responds with a marked-up counter that adds the seller-protective items the buyer left out (break fee, capped indemnification, tight working capital definition). Whoever drafts has agenda control, so a sophisticated seller who knows the deal is coming sometimes drafts first to set the framing.

Do I need an attorney to review a term sheet on a $1M sale?

Yes. The math says so. An M&A attorney charges $5,000 to $15,000 to review and negotiate a term sheet for a small business sale. The items they catch (vague indemnification, missing basket, unenforceable non-compete, ambiguous earnout) typically swing $50,000 to $200,000 of value on a $1M deal. The return on attorney spend is consistently 5x to 20x at this deal size.

What happens if the buyer walks after signing the term sheet?

If the term sheet had no break fee, the seller is out the diligence period and any legal fees with no recourse beyond the binding confidentiality and exclusivity sections. If the term sheet had a break fee, the seller collects it (assuming the buyer walked without cause as defined in the document). If the buyer walked because a closing condition was not satisfied (SBA financing denied, material adverse finding in diligence), the break fee typically does not apply.

Can a term sheet be reopened after signing?

The economic terms can be reopened by mutual agreement, and frequently are. The most common reopener is a quality of earnings (QofE) finding that reduces normalized EBITDA, which then triggers a price adjustment. A seller who accepts a “QofE adjustment” without negotiating the methodology in the term sheet itself gives the buyer a free option to lower the price. Tie any QofE-driven price changes to specific, named adjustments in the original term sheet to prevent unlimited reopening.

What to Do Next

Most small business owners sign a term sheet exactly once in their lives, on the most important transaction of their financial life, and they sign it without an experienced sell-side advisor at the table. The buyer has done this many times. The buyer’s attorney has done this hundreds of times. The bank has done this thousands of times. The seller has done it never.

CT Acquisitions represents sellers on Main Street deals between $500,000 and $5,000,000. We mark up term sheets line by line, we negotiate against the buyer’s attorney directly, and we get paid by the buyer at closing, not by the seller. If you have a term sheet in hand or expect one soon, send it over before you sign anything.