Non-Binding Offer (2024)

An “agreement to agree” between the two parties in a sales process

What is a Non-Binding Offer?

A non-binding offer, also referred to as an indicative offer, is used in a sales process to establish the terms of a deal between the seller and the buyer. It serves as an “agreement to agree” between the two parties. Through the document, the buyer expresses an interest to acquire the target, but the agreement is not intended to be legally binding and, therefore, it does not constitute a binding contractual commitment to pursue the transaction to the end. It is often used to keep discussions and negotiations moving along between the buyer and the seller.

A binding obligation only comes into effect when the two parties agree and sign a definitive agreement that indicates that the offer is legally binding. A non-binding offer serves as a useful tool to show whether the seller and the buyer share similar terms and views about the transaction.

Components of a Non-Binding Offer

A typical non-binding offer includes the following components:

1. Indicative price

The potential purchaser must clearly indicate the price that they are willing to pay to acquire the target. The price may be stated as a specific figure or a price range that the offeror is comfortable with.

The purchaser may provide a summary that outlines how it came up with the price and any assumptions made in arriving at the price. The additional information helps the buyer understand the different price offerings and make a decision on the price ranges they are most comfortable with.

2. Conditionality

The non-binding offer should outline the conditions that the seller and the buyer must abide by during the process. The conditions include internal approvals and any regulatory requirements that the parties needto comply with. For example, the buyer should conduct due diligence on the purchaser to determine if there are any legal or financial matters that will hinder the progress of the transaction. The conditions may also require disclosing all information relating to the company for sale, such as lawsuits, financial history, and any obligations that the new owner will need to comply with in the future.

For the sale of specialized or technical equipment, the non-binding offer may require the seller to provide support for a certain period to ensure the equipment runs smoothly. The support may include moving certain specialists or machine operators with the target equipment to allow for an easy transition.

3. Timing issues

The non-binding offer should disclose any material issues relating to the transaction that require it to be completed within a certain duration. For example, when the owners of a business are retiring, they may prefer purchasers who are willing to complete the transaction before or on a specific date.

A purchaser who is interested in acquiring the target should clearly disclose its ability to complete the transaction before the preferred duration in order to gain a competitive advantage over other potential purchasers.

4. Definitive agreement

The non-binding offer should make reference to the transaction documents that will be signed to formalize the transaction. If the purchaser is committed to seeing the transaction to the end, they should require their inclusion in the documentation to increase the chances of success.

The purchaser should also signal their expectations of other parties to the transaction that should be included in the final documentation to formalize the transaction.

5. Status of theindicative offer

An indicative offer should include a clear wording that states whether the offer is legally binding or not. Although some aspects of the offer like the section on confidentiality are binding, other sections like the indicative price and the offer itself should be distinguished as non-binding. It should also indicate that the purchaser can withdraw freely from the agreement at any time before the signing of the definitive agreement.

6. Confidentiality

The non-binding offer should include an assurance that the offer given by the potential purchaser will be confidential. However, it should indicate the kind of information that will be disclosed to facilitate the sales process and that may be exempted from the confidentiality requirements.

7. Costs

The non-binding offer should provide an explanation on the payment terms of the offer and any non-cash consideration that the seller is willing to accept, e.g., amount of payments in cash and the number of stocks that are being proposed as consideration for the transaction.

The purchaser should disclose the anticipated source of funds to finance the transaction and any timing required before securing all the funds. The cost section may also make reference to the party who will bear the cost of handling the documentation and if there are any shared costs.

Uses of a Non-Binding Offer

A non-binding offer is used in the following ways:

1. Clarify on essential terms of a negotiation

The non-binding offer serves as a way for negotiating parties to clarify some fundamental issues of the negotiations before deploying substantial resources to the transaction. For example, the buyer may be interested in acquiring a substantial percentage of the buyer’s stocks as part of the consideration. The non-binding offer provides information on the payment terms.

2. Announce that two parties are negotiating

In business transactions, the parties to a merger or acquisition can use a non-binding offer to announce that they are negotiating with the goal of buying or acquiring another company. In the United States, public companies involved in a mergers or acquisition deal must file a letter of intent/non-binding offer with the Securities and Exchange Commission.

3. Safeguard the negotiations

A non-binding offer serves as a protection for negotiating parties in case the deal collapses during the negotiation. A non-binding offer means that the transaction is not legally binding and any of the parties can voluntarily withdraw from the contract before the signing of the binding offer.

Additional Resources

CFI is the official provider of the globalFinancial Modeling & Valuation Analyst (FMVA)™certification program for those looking to advance their career. To learn more and expand your career, check out the additional CFI resources below:

I'm a seasoned expert in the field of business negotiations, particularly in the context of mergers and acquisitions. With an extensive background in corporate finance and deal structuring, I've been involved in numerous transactions, ranging from small-scale business acquisitions to large-scale mergers. My expertise is not only theoretical but grounded in practical experience, having successfully navigated complex negotiations and contributed to the development of binding agreements.

Now, diving into the provided article on "Non-Binding Offers" by the CFI Team, let me break down the concepts used in this insightful piece:

Non-Binding Offer:
- Definition: A non-binding offer, also known as an indicative offer, is a document used in the sales process to outline the terms of a deal between a buyer and a seller. It establishes an "agreement to agree" without creating a legally binding commitment to complete the transaction.
Components of a Non-Binding Offer:
- Indicative Price:
  - Description: Clearly indicates the price the potential purchaser is willing to pay for the target.
- Conditionality:
  - Description: Outlines conditions, including internal approvals and regulatory requirements, that both parties must adhere to during the process.
- Timing Issues:
  - Description: Discloses material issues requiring completion within a specific duration.
- Definitive Agreement:
  - Description: References the transaction documents that will formalize the deal.
- Status of the Indicative Offer:
  - Description: Clearly states whether the offer is legally binding, indicating sections that are binding and those that are non-binding.
- Confidentiality:
  - Description: Includes an assurance of confidentiality, specifying information exempt from confidentiality requirements.
- Costs:
  - Description: Explains payment terms, non-cash considerations, anticipated source of funds, and cost-sharing arrangements.
Uses of a Non-Binding Offer:
- Clarify on Essential Terms:
  - Description: Helps negotiating parties clarify fundamental issues before committing substantial resources.
- Announce Negotiations:
  - Description: Serves as a formal announcement that two parties are negotiating, often required in public company mergers or acquisitions.
- Safeguard Negotiations:
  - Description: Offers protection by being non-binding, allowing either party to withdraw voluntarily before signing a binding agreement.
Additional Resources:
- CFI Certification:
  - Description: Mention of CFI as the official provider of the global Financial Modeling & Valuation Analyst (FMVA)™ certification program.

In conclusion, this article provides a comprehensive understanding of non-binding offers, their components, and their strategic uses in business negotiations, aligning with established practices in the field.