M&A Vocabulary – Experts explain: Non-Binding Offer

published on 17 July 2024 | reading time approx. 2 minutes

In this ongoing series, a number of different M&A experts from the global offices of Rödl & Partner present an important term from the specialist language of the mergers and acquisitions world, combined with some comments on how it is used. We are not attempting to provide expert legal precision, review linguistic nuances or present an exhaustive definition, but rather to give or refresh a basic understanding of a term and provide some useful tips from our consultancy practice.

A so-called "non-binding offer" (NBO) often occurs at the beginning of an M&A process, possibly after the exchange of initial information on the target company on the basis of a non-disclosure agreement (NDA). The terms "letter of intent" or "indicative offer" are also commonly used. Ultimately, the intention of the potential buyer is to make clear to the seller his interest in and initial ideas about the key data of the planned transaction. This procedure is particularly common in bidding processes and serves to reduce the number of interested parties.

With the non-binding offer, the potential buyer submits a unilateral, non-binding offer to the seller, which in particular contains an initial purchase price indication. In this way, the buyer documents the seriousness of his potential interest in buying and sets out the circumstances and conditions under which he is prepared to enter into negotiations. The seller, on the other hand, can use the non-binding offer to better assess the interests of potential buyers and, in particular, decide whether and with which interested parties he would like to enter the next phase of negotiations.

In order to achieve these goals, a non-binding offer usually contains:

Purchase price indication, which should clearly distinguish between enterprise value and equity value
As far as possible, a reconciliation of the enterprise value on the basis of key company figures already communicated (equity bridge)
Timetable for the further process
Information requirements for the due diligence
Strategic plans for the target company after the takeover

Based on this indicative offer from the individual potential buyers, the seller can then already decide which potential buyers remain "in the running" and identify initial topics for discussion in order to further narrow down the group of buyers as part of the bidding process.

However, the non-binding offer does not yet contain any binding obligations to acquire the company in principle or on these terms. The potential buyer can therefore still withdraw from the bidding process at this stage or adjust the parameters specified in the NBO at a later stage. Nevertheless, certain collateral obligations may already arise for the potential buyer in this phase, as he will in particular be obliged to treat information obtained confidentially and to take the seller's interests into consideration. Violations of these obligations can then trigger liability even without the conclusion of a contract.

In the next phase, potential buyers are then granted access to further information about the company via a data room so that all buyers can carry out a due diligence review in order to evaluate the company more precisely. Only after the due diligence process has been successfully completed the buyer then submits a binding offer if he still wishes to acquire the company.

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