Dancing in the Dark – the art of the indicative offer

Acquirers often express dismay at the expectation that they will put pen to paper on an indicative offer for a business at a point when they have received relatively little financial information and have had no opportunity validate any of it. But to briefly look at this from the would-be vendor’s perspective, why would they share huge amounts of detail with a third party unless they know that at the end of that sharing is a deal they want to do?

The best way to think about this part of an acquisition process is that it is a sort of courtship dance. The vendor has given you the information that they believe you should need to form a view on appetite (ie are you interested in buying their business) and valuation (ie how much do you think you are prepared to pay for it). They have shown you theirs…

At this point in the process, you have no option but to assume that what you have been shown is a fair representation of reality and put to one side the natural scepticism you might feel about the data provided or the hunger you feel to dig into it further. An indicative offer is just that, indicative. It is not legally binding, and it can be caveated or hedged in any way you feel appropriate. It would almost always be caveated by reference to “confirmatory due diligence” but if you have specific concerns or doubts you can indicate them in making an indicative offer. But if you want the right to delve further into the business you will need to earn the right to do so by making an indicative offer that is acceptable to the vendor. In other words, you need to show them yours….

None of this is to say that the process of formulating the offer should be taken lightly. If an offer is to be taken seriously by the vendor, then it needs to clearly state the assumptions that have been made in arriving at the offer and any specific areas of due diligence that you would want to focus on in taking things forward. It equally needs to respect the information that has been provided and to reflect any doubts you have about it only by reference to the way that the offer might/would vary if things are not as indicated. It would be provocative to simply ignore the information provided in formulating an offer.

It is often sensible to frame an indicative offer by reference to a specific figure or figures in the information provided so that if, in due diligence, that figure is proved to be optimistic, it is self-evident that the overall price will change.

Once an indicative offer has been made, negotiated and accepted, then as acquirer it would be reasonable to expect a period of exclusivity, during which the vendor cannot legally speak to other potential suitors. At this stage you will get the opportunity to fully dig into the information and establish whether the assumptions underpinning your offer are reasonable.

As advisers to vendors, we are always cognisant of the need to be honest in communicating information to potential acquirers. If an indicative offer is based on unreliable or optimistic financial information it will not be worth the paper it is written on. It is therefore a shared endeavour to get to the “right” answer.

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Wendy Hart

Partner