Indicative offer

The process of buying a company: the indicative offer

You have identified the company you want to buy. You have started the acquisition process and the first contacts with the current owners have already taken place. Now, you are interested in finding out more and there comes a point when the seller asks you to move from words to deeds. The seller refuses to give you any more information until you put a price and show that you are a serious buyer. This is when you should make an indicative offer.


Advantages of an indicative offer for all parties

The biggest advantage of the indicative offer is that it is not legally binding.

The indicative offer allows you to create a reference of where the buyer is going and what the seller can expect. It helps the seller to determine whether or not it is worth pursuing negotiations and if there is a chance of reaching an agreement.

It is also a way for you to show the seller that you are serious.

Content

The indicative offer indicates an approximate price range, whether it is to be paid in cash or shares and the time you give each other to sign a letter of intent. It also allows you to set a timetable for the transaction. It can, however, be a vague document as its purpose is to put in writing an first proposal to start negotiations.

One businessman told me that, while he was in a meeting, a messenger came to the company and insisted that he had to deliver a letter to him personally. He went out, picked it up, waited until he had finished the meeting and then opened it. When he did so, he found an indicative offer for his company. It almost gave him something. “I’m being bought,” he thought. And he began to imagine what he would do next, what he would do with the money and how he would tell his family.

Key components of the indicative offer

  • Price and structure

Purchase price: The proposed price to be paid by the target company, which may be cash, shares or a combination of both.

Payment structure: Details of how and when the payment will be made (e.g. lump sum, timing, benefits).

  • Due diligence

The framework and timetable for the buyer to conduct due diligence on the target company, including financial, legal, operational and commercial reviews.

  • Timing of the transaction

The expected timetable for the transaction, including key milestones such as due diligence, signing of definitive agreements, regulatory approvals and closing.

  • Pre-conditions

Specific conditions that must be met before the transaction can be completed, such as regulatory approvals, shareholder approvals and the absence of material adverse changes.

  • Exclusivity

The period during which the seller agrees not to solicit or negotiate with other potential buyers, allowing the buyer to conduct due diligence and negotiate without competition.

  • Confidentiality

Measures to ensure the confidentiality of all information exchanged during the negotiation and due diligence process.

  • Indicative valuation

Assessment of the value of the target company based on preliminary information, often subject to adjustment after due diligence.

  • Assumptions and risks

Key assumptions underlying the offer and potential risks that could affect the transaction.

  • Approval and implementation

Any necessary approvals from the boards of directors, shareholders or regulatory bodies of the buyer and seller.

Objective and importance of the indicative offer

Framework for negotiation: The indicative offer lays the groundwork for detailed negotiations, providing a reference point for the terms of the final deal.

Seriousness of interest: Demonstrates the buyer’s serious intention to pursue the acquisition, which may encourage the seller to engage further.

Risk mitigation: By outlining preliminary terms, both parties can identify and address potential deal-breakers early in the process.

Conclusion

As you can see, an indicative offer, even if it has no legal value, can have a significant impact on an entrepreneur who has never considered selling his business before. For the buyer, it offers a way to start negotiations without making a legal commitment, assessing the seller’s receptiveness and adjusting the offer with additional information. At the same time, it sends a signal of seriousness that can gain the seller’s trust.

For the seller, receiving an indicative offer provides a benchmark for the value of his or her business and helps to make informed decisions. It establishes a preliminary framework for negotiation, clarifying key terms and streamlining the acquisition process. In short, although non-binding, an indicative offer facilitates an environment of collaboration and understanding, essential for a successful transaction.

Written by Enrique Quemada, President of ONEtoONE Corporate Finance.

Since 2004, Enrique is the Chairman at ONEtoONE Corporate Finance Group and a member of multiple boards of directors. Advisor of the Board of Global Fintech Association. Enrique is a graduate of the Harvard Business School’s prestigious three-year Presidents Management Program (OPM), a world class program for Presidents and Owners of relevant companies designed to improve leadership effectiveness, build strategic consensus, and gain the skills necessary for future success.

The process of buying a company is long and there are moments of intense emotions, ruptures, crises, when it seems that the operation has collapsed. Those of us who have participated in numerous operations know that it is a question of perseverance, of not giving up, of looking for creative formulas that will lift the operation again and again until we achieve our objectives. If you are looking to buy a company that will strengthen yours, do not hesitate to contact us!

Leave a Reply

Your email address will not be published. Required fields are marked *