Indicative Offer
An indicative offer is a buyer's non-binding statement of what it would pay and on what terms, made after reading the information memorandum and before due diligence — usually a valuation range, the form of consideration, the funding, the conditions and the timetable. In an auction it is the first round: the seller uses the indicative offers to decide which bidders see the data room.
- Also known as
- Indication of interest, IOI, Non-binding offer, NBO
- Used at
- the first round of a sale process, two to four weeks after the information memorandum goes out; also unsolicited, as the opening of a bilateral approach
- Binding
- no — expressly non-binding as to price and terms, though the confidentiality agreement it sits under is binding
- Typical content
- an enterprise value or a range, cash-free debt-free; how it is funded; what is assumed about working capital and debt; the diligence needed; the approvals required; a timetable; the buyer's rationale
- Typical number
- a well-run process gets four to eight indicative offers and takes two to four bidders into the second round
- Parties
- the seller and its adviser, who write the process letter; the bidders; nobody else yet
How an indicative offer works in practice
The seller's adviser sends a process letter with the information memorandum: what an indicative offer must contain and when it is due. Bidders answer with a letter — three to six pages — that says what they would pay and how they got there. The number is a range, deliberately, because the bidder has seen a marketing document and not the accounts; the letter states the assumptions the range rests on — normalised EBITDA, a working capital target, no debt — so the seller can compare offers on the same basis.
The seller reads the letters for more than the number. A bidder that needs financing it has not arranged, or an approval it has not thought about, or a diligence list that will take six months, is offering less than its range says. A strategic buyer that explains why the business is worth more to it than to a fund is telling the seller where the second-round price will end up. The adviser takes the strongest three or four into the second round, where they see the data room and management, and asks for binding offers.
For a fintech target the indicative offer is also where a bidder shows whether it understands the regulatory path: a letter that names the change-of-control approval, the capital it will need to hold and the sponsor-bank consents is from a bidder that will close.
Example
A seller of a payments company with €6m of normalised EBITDA receives six indicative offers: ranges from €36–42m to €55–65m. The highest, from a US processor, is conditional on financing "to be arranged" and a 16-week diligence period; the second, €50–56m from a European group, is funded from cash, names the regulator's approval as its one condition and asks for eight weeks. A fund offers €44–48m with a management incentive plan attached. The seller takes the second and third into round two and, after the data room, receives binding offers of €52m and €47m. The US bidder, asked to firm up its financing, drops out — its range was never a price.
Common mistakes
- Bidding a single number rather than a range and losing room to move when diligence turns something up. - A range so wide it says nothing, and gets the bidder dropped as unserious. - Assumptions left unstated, so the seller's comparison is between offers on different bases. - Reading the highest indicative offer as the highest price; conditions and funding are the price too. - Sellers running a second round with too many bidders, so none invests in diligence properly.