Binding Offer
A binding offer is a bidder's firm proposal at the end of the second round of a sale process: a price, a marked-up sale agreement it is prepared to sign, evidence of committed funding, its approvals and conditions, and a timetable to signing. Unlike the indicative offer it is not a range and not a conversation-opener; it is what the bidder will sign, and the seller chooses between binding offers on the terms as much as the number.
- Also known as
- Final offer, Firm offer, Binding bid
- Used at
- the close of due diligence in an auction — usually six to eight weeks after the second round begins; in a bilateral deal, the equivalent is the agreed heads of terms turning into a signed agreement
- Binding
- in name and in practice, though most binding offers remain subject to signing the agreement, and a bidder can still walk before then at the cost of its credibility and, sometimes, of a cost-cover payment; a truly binding offer is one the seller can accept to form a contract, which is rarer
- Typical content
- a fixed price and the basis (cash-free debt-free, working capital target); a mark-up of the seller's draft agreement; funding evidence — equity commitment letters, debt commitment papers; board and regulatory approvals obtained or required; remaining conditions; confirmation that diligence is complete; a signing date
- Typical comparison
- price, certainty (funding, conditions, approvals), terms (warranty caps, escrow, earn-out), speed, and what the bidder plans for the business and its people
- Parties
- the bidders and their advisers, the seller and its board, and the seller's lawyers, who compare the mark-ups
How a binding offer works in practice
By the end of the second round a bidder has read the data room, met management, done its financial, legal, commercial and technology diligence, and marked up the sale agreement the seller issued. Its binding offer letter states the price it will pay — not a range — and attaches the mark-up: every change it wants to the seller's draft, from the warranty cap to the definition of debt. It attaches its funding: a fund's equity commitment letter, a bank's debt commitment letter, or a strategic buyer's board minute approving the deal. It states what approvals it still needs and what conditions remain, and it confirms diligence is complete, so that the price is not subject to further findings.
The seller reads three things. The price, adjusted for what the mark-up does to it — a lower warranty cap and a higher working capital target are price reductions in disguise. The certainty — a bidder whose debt is "highly confident" rather than committed, or whose board has not yet approved, is offering an option, not a deal. And the timetable — a bidder that can sign in two weeks with one condition is worth more than a higher bidder with a financing condition and a four-month approval.
For a fintech target the regulatory condition is in every binding offer; the difference between bidders is whether they have already spoken to the regulator, and what conditions they will accept from it.
Example
A seller receives three binding offers for a payments company. A: €55m, fully funded from cash, mark-up accepts a 20% warranty cap and a €3m escrow, one condition (regulatory approval), signing in ten days. B: €58m, €35m of it debt under a commitment letter with a market-flex clause, mark-up cuts the cap to 10% and adds a MAC condition tied to monthly revenue, signing in three weeks. C: €60m, financing "to be finalised", diligence "substantially complete", board approval pending. The seller's lawyers price the mark-ups: B's cap and MAC are worth about €2m of risk to the seller; C's offer is not an offer. The seller signs with A at €56m after one call. The €4m headline difference bought certainty that the higher bids did not have.
Common mistakes
- Binding offers that are conditional on diligence the bidder has not finished — the seller reads them as indicative. - A mark-up delivered without the offer letter, or an offer letter without the mark-up, so the seller cannot compare. - Funding evidence that is a letter of interest, not a commitment. - Sellers choosing the highest number and negotiating the terms afterwards, from a position that no longer exists. - Bidders walking after a binding offer without a finding, and being remembered by every adviser in the market.