Non-Binding Offer

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21 Aug, 2024

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A non-binding offer refers to a document utilized when carrying out a sales process to outline the terms of the deal taking place between the seller and the buyer. With the help of this document, buyers express their interest in purchasing the target and commit to ensuring the process’s confidentiality.

Also known as an indicative offer, this document is not legally binding. Hence, there is no binding contractual commitment for pursuing transactions till the end. Persons often use this document to keep negotiations and discussions active between sellers and buyers. Such a document can help determine whether the buyer and the seller have similar views and terms regarding the transaction.

What Is A Non-Binding Offer?

The non-binding offer refers to a document that states the terms of a deal between a purchaser and a seller during a sale procedure. Such a document enables the potential buyers to express their interest in buying the target company.
Some components of an indicative letter are cost, timing issues, conditionality, and confidentiality.
Indicative offers can offer protection to both parties against lawsuits and provide clarity regarding multiple aspects of a deal.
A binding offer is made following the completion of the due diligence procedure, while an indicative offer is made before varying out due diligence.

Non-Binding Offer Explained

The non-binding offer refers to a term sheet utilized in a sales procedure that forms a negotiating framework between sellers and potential buyers as they negotiate to establish a definitive sales and purchase agreement (SPA). This document expresses the potential buyers’ interest in entering into an agreement with the seller and acquiring the target.

In short, it allows preliminary negotiations between both parties without legal obligation. One must remember that a binding obligation comes into effect only when the seller and the buyer reach an agreement and put their signature on a definitive SPA. Even after the signing of an indicative offer, the framework remains non-binding.

Until the parties sign a purchase agreement, the potential buyer may acquire more information about the target, especially when conducting the due diligence procedure. This might affect the terms of the non-binding offer letter. One must remember that the renegotiation of the transaction’s structure and the target’s value may occur, or the deal could fall through if the potential purchaser finds any negative information during the due diligence procedure.

Potential buyers must focus on making the indicative offer as appealing as possible to ensure it stands out from the other buyers. The offer must demonstrate the buyer’s capability to meet the seller’s terms. The use of such documents is common in the case of mergers and acquisitions.

Components

The components of a non-binding offer letter are as follows:

#1 - Conditionality

This document must state the conditions the buyer and the seller must meet during the sale process. Such conditions include regulatory requirements both parties must fulfill and internal approvals they need to get.

#2 - Indicative Price

Potential purchasers must mention the price they can pay to buy the target. Note that the price can be a certain figure. Alternatively, companies can mention a price range that is comfortable for the potential buyer. The purchaser can provide a summary outlining the process through which they determined the price.

#3 - Timing Issues

The indicative offer must disclose material issues related to the transaction, requiring it to be finished within a specific period. For instance, when a business’s owners retire, they may favor buyers ready to carry out the transaction on or before a certain date.

A buyer interested in purchasing the target must clearly reveal their capability to perform the transaction prior to the preferred timeframe for gaining a competitive advantage.

#4 - Costs

An indicative offer must offer an explanation regarding the payment terms in the document and non-cash considerations the seller is ready to accept.

The buyer must also disclose the expected source of funds for financing the transaction and whether any timing is necessary before securing the funds. Additionally, this section of the document may state which party will pay for the documentation’s handling cost besides mentioning if there is any shared cost.

#5 - Confidentiality

The indicative offer must include an assurance that the potential buyer’s offer will remain confidential. That said, it must indicate what type of information will be disclosed to ensure the sale process is smooth. Moreover, this section must mention the kind of information that could be subject to exemption from confidentiality requirements.

#6 - Definitive Agreement

A non-binding offer must refer to transaction documents that the parties must sign to give the transaction a formal or legal status. If the buyer remains committed to seeing the transaction till the end, they must require inclusion of the documents. This will increase the possibility of success.

#7 - The Indicative Offer’s Status

This document must have clear wording stating if it is legally enforceable or not. While some aspects, for example, the section concerning confidentiality, is binding, other sections, including the proposal and the indicative price, must be non-binding. Moreover, this section must indicate that the potential buyer can withdraw from the agreement at their convenience before the parties sign the definitive agreement.

Examples

Let us look at a few non-binding offer examples to understand the concept better.

Example #1

Suppose Company ABC was interested in taking over Company XYZ. The former prepared an indicative offer and sent it to XYZ. The document mentioned key elements like the price ABC is willing to pay for the acquisition and what details must remain confidential. Moreover, the document also mentioned that ABC will bear the transaction’s handling cost.

After getting this letter, Company XYZ negotiated certain terms of the deal and allowed ABC to carry out the due diligence process. Once the process was over, ABC and XYZ signed a definitive SPA, and the former completed the transaction.

Example #2

Check-Cap’s stock price surged in July 2023 after Symetryx announced that it made a non-binding offer to acquire the Israel-based clinical-stage medical diagnostic organization. The latter has said that its offer is contingent upon multiple conditions, which include the immediate engagement by the board of directors (BOD) of Check-Cap. Moreover, Symetryx believes that the offer could create a lot of value for Check-Cap’s shareholders.

Uses

Organizations may utilize this document in the following ways:

Clarity: Businesses can use this to ensure clarity as it clearly gives an idea regarding both parties’ intentions.
Announcement Of Negotiations: Companies can use this document to announce the intended takeover or merger and show that both parties are negotiating.

Binding vs Non-Binding Offer

The differences between an indicative offer and a binding offer are as follows:

A binding offer is made by a purchaser once the due diligence process is complete. On the other hand, a potential purchaser makes an indicative offer before completing the due diligence procedure.
A binding offer constitutes a formal contract if a seller accepts the purchaser’s terms. It is legally enforceable, unlike a non-binding offer.
An indicative letter is a precursor to a binding offer. Unlike the latter, it does not include an element of acceptance and offer.
An indicative offer has the consideration element, unlike a binding offer.

Letter Of Intent vs Non-Binding Offer

The concepts of indicative letter and letter of intent can seem confusing, considering they have a few similarities. So, let us look at their distinct features.

Letter Of Intent	Non-Binding Offer
This document is used by organizations to establish the framework for engaging in negotiations.	This is a term sheet that states a deal’s key terms and conditions. Such a document serves as a guideline for further negotiations.
It does not mention conditions that must be fulfilled for the offer to stay valid.	It can specify certain conditions that must be fulfilled for the offer to stay valid.

Frequently Asked Questions (FAQs)

1. What are the disadvantages of non-binding offers?

Since the document is not legally enforceable, either party may choose to back out of an agreement. This can create problems for a party already working based on the non-binding document. Note that there is no legal consequence for getting out of a contract.

2. What is the acceptance of a non-binding offer?

It means that both the buyer and the seller have reached an agreement regarding the crucial commercial terms for a transaction to progress, for example, timing, price, and structure.

3. What are the benefits of a non-binding offer?

The advantages of an indicative offer are as follows:
- It can save time by helping businesses avoid lengthy negotiations.
- Such a document can make the sales process straightforward and more transparent.
- This document allows both parties to be aware of each other’s intentions.
It allows the buyer to leave a deal if the due diligence process leads to discovering anything that can cause problems later on.