Definition - What does Indicative Offer mean?
An indicative offer, also known as a letter of intent (LOI) or non-binding offer, is the term sheet used in a sales process which establishes a contractual negotiating framework between the potential buyer and the seller as they work toward a definitive purchase and sale agreement (PSA). Through this non-binding document, the potential buyer expresses an interest in acquiring the target and commits to good faith negotiations while ensuring the confidentiality of the process.
The essential components of an indicative offer include:
- The purpose and structure of the transaction;
- The determination of a price range (or at least the method for determining the purchase price);
- An explanation of the payment terms and any non-cash consideration that is being proposed;
- The anticipated sources of financing and the timing and steps required to secure such funds;
- A timetable of negotiations stating the length of this process, the period of due diligence, and the expected closing date; and
- Additional clauses that may need to be included such as a non-compete agreement, an exclusivity period, or the expectation of further involvement by the owner after selling.
Divestopedia explains Indicative Offer
As part of a structured sales process, an indicative offer is usually prepared based on the details provided in the Confidential Information Memorandum (CIM) and after several management meetings between the buyer and seller. Following up this offer, the target determines if the potential buyer should enter into the second round of the sales process, which would include site visits and access to the data room for more in-depth due diligence.
In order for the seller to vet the likelihood and ability of the buyer to close the deal, an indicative offer should outline the buyer's plan for funding the transaction. Keep in mind that even after the indicative offer is signed, it remains a non-binding framework. In other words, nothing is agreed and there is still a significant amount of work to be completed before closing the deal. Until the purchase agreement is signed, additional information about the organization may be discovered, especially during the due diligence process, which might impact the terms of the initial indicative offer. The value of the target and structure of the transaction may be renegotiated or the deal may fall apart if negative information is uncovered during this due diligence process following the indicative offer.
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