Every M&A is unique, but every UK business transaction will follow a defined process. Our M&A Consultants discuss what Indicative Offers are, how they work and how you can prepare one.
Every M&A is unique, but every UK business transaction will follow a defined process. After identifying a suitable target, the prospective buyer reaches a point where they need to show that they’re committed to making the deal.
The indicative offer is the non-binding offer that indicates a buyer is serious about purchasing a company. With UK M&A value rising by two-thirds in H1 2024, opportunities abound and knowing how this step in the process works is crucial for advancing your next deal.
Let’s discuss what these offers are, how they work and how to prepare one.
What does an indicative offer mean?
Indicative offers represent the first offer a buyer will put down as part of a sales process. Also known as non-binding offers or Letters of Intent (LOI), these don’t commit the buyer to going through the deal but show that they’re serious.
Essentially, an indicative offer demonstrates that you’re interested in acquiring the company. However, due to its non-binding nature, a buyer can still make an offer and back out at any point without any consequences.
It’s designed to maintain discussions and propel negotiations forward between the buyer and seller.
What is an indicative offer in an M&A?
M&A deals may involve multiple potential buyers or a seller not actively interested in being taken over. The landscape differs depending on the circumstances, but every seller will expect an indicative offer at some point.
The whole point is to show that the buyer is serious and isn’t simply on a fishing expedition. The following due diligence process will involve a thorough investigation of the seller’s firm, and the last thing they want is to give up their secrets to a buyer who isn’t genuinely interested in acquiring them.
An indicative offer comes before the due diligence phase, ensuring alignment between parties. The simplest way to think about it is a screening tool. If there’s a significant chasm between buyer and seller, the indicative offer will show that and prevent each party from wasting their time.
For example, the Australian real estate conglomerate, the REA Group, submitted an indicative offer to purchase Rightmove in 2024. Despite representing a 27% premium above the company’s market value, the board unanimously rejected it as opportunistic. Rejecting the offer at this stage prevented both parties from wasting their time and resources on a drawn-out due diligence process.
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Use of indicative offers in M&As
Why are indicative offers utilised within the M&A process? In short, some of the benefits include:
Above all, it’s worth mentioning that indicative offers are anchors within M&A deals. They provide some common ground that both parties can refer to, even if they’re far apart on terms and price.
Preparation of an indicative offer
The UK has seen a surge in M&A activity lately. According to the latest figures, foreign firms alone spent £7.8 billion on purchasing UK businesses in Q3 2024. Every one of these deals would have involved a comprehensive indicative offer.
What a non-binding offer looks like will vary based on the party, with some opting for comprehensive documents and others preferring to restrict it to the salient points.
Regardless of length, these M&A documents follow roughly the same structure.
Here are the core elements to include in an indicative offer letter:
Your indicative offer is a temperature check to determine if a deal is possible. Although they’re not a mandatory part of conducting an M&A deal in the UK, they may as well be, as they will be expected.
What matters when preparing a letter is getting the basics right. Terms and prices are liable to change before you commit to a final, legally binding agreement. However, setting expectations early ensures that both parties are on the same wavelength.
If you’ve reached this part of your M&A deal, it’s time to work with an experienced M&A business consultant to prepare your letter and move forward with the due diligence process. At Hilton Smythe, we boast decades of collective experience across every sector of the UK economy.
For bespoke support from the country’s leading business consultancy, schedule your consultation by getting in touch with the team now.