Non-Binding Offer

What Is A Non-Binding Offer?

In the world of business and finance, many deals and contracts are entered into by the parties. Due to the complexity of business nowadays, the need to harmonize the business processes contributed to the popularity of certain types of agreements.

One standard agreement is the Non-binding Offer, sometimes referred to as the Letter of Intent in other business circles.

The letter of Intent has more extensive use in the business sector today than ever. The reasons are attributed to the advantages it offers the parties intending to get into an agreement.

Thus, it is not disputed that this document offers certain advantages for both the seller and the buyer. But unfortunately, many people use the indicative offer in complex and huge deals. 

However, it's common for someone to confuse a binding contract with this agreement. Therefore, it's essential to know what a Non-binding offer is and how it differs from a binding agreement. 

Understanding A Non-Binding Offer

A non-binding offer, also known as an indicative offer, is a document used in a sales process. It lays out the terms of a deal between the buyer and the seller:

• An indicative offer serves as an agreement to agree, not a contract.
• It expresses the buyer's interest in entering into a contract or agreement with the seller.
• Shows aspirations and transaction details between the buyer and seller.
• Allows preliminary negotiations without legal binding to the actual contract.
• Used in business and finance, particularly in Mergers and Acquisitions.
• Example: Union Steel Holdings used a Letter of Intent with Megafab Engineering for the sale of its subsidiary.

Uses of a Non-Binding Offer

This is an essential business document used in business transactions.

The following are the uses of an indicative offer:

1. Clarity

This document is the basis upon which negotiations are launched, and its primary use is to ensure clarity. It lays out the intention of the parties willing to enter into negotiations.    

2. For announcing negotiations

The second use of this document is to announce the merger or acquisition intended by the willing parties and show that they are negotiating. The developed nations use this document to inform the regulatory body of the parties' intentions.

3. Protection against Lawsuits

This document protects negotiating parties in case the deal collapses during the negotiation. Therefore, the Non-binding Offer is commonly used today due to its benefits, mainly attributed to its ability to shield the parties involved from a lawsuit. 

These elements of a letter of Intent are very important in business because of their advantages to both buyer and seller. The parties that sign this document get protected against any lawsuits when they fall apart.

Also, the aims and aspirations of the parties are outlined to open up negotiations between the buyer and seller.

For Instance, Graphene Manufacturing Group GMG signed non-binding agreements with engineering companies Bosch, Wood, and mining giant Rio Tinto to advance the company's product implementation and production capacity.

The GMG and Rio Tinto deal was announced in May 2022. The deal sees the parties explore the use of energy-saving products, support GMG's development of graphene aluminium-ion batteries (G+AlB), and collaborate on incorporating GMG products into mining and other industrial applications.

Similarly to other instances, the offer letter was used because of the advantages it grants the parties who aim to enter into a contract.

the Components of a Non-Binding Offer

An ordinary non-binding offer is expected to include the following components:

1. Price offer 

The intending buyer must indicate the price they are willing to pay to acquire the target. This is one of the essential elements of an Indicative offer. The price should be stated as either a definite figure or a price range that the seller is willing to accept.

The buyers may provide a summary outlining how they have come up with the price and any considerations made in arriving at it.

This part of the document plays an important role. First, it allows the buyers to appreciate the price offerings. Consequently, this makes them decide on the price ranges they are willing to pay.

2. Conditionality

An Indicative offer outlines the conditions the seller and the buyer must abide by during the process of binding the contract. It should disclose all information necessary.

3. Disclosures 

This document intends to disclose all information relevant to the transaction, such as debt, liabilities, and other concerns that requires it to be done within a certain period.

4. Defined Agreement 

This tells the transaction's core or essence. This is part of the agreement where the parties set out the preliminary issue to be discussed by the parties.

5. Legal status 

An indicative offer usually is labeled as such. Typically, its wording must spell out whether the offer is legally binding and should be clear.

However, it's important to note that some areas may be binding even if it's a non-binding offer. These can be the sections where sensitive information is laid out. Thus, some areas may demand confidentiality while other sections, like the price offered, are usually non-binding.

6. Confidentiality

The indicative letter is always subject to confidentiality. The buyer in the negotiations is usually expected to keep information deemed sensitive to the seller. 

It's important to note that though the document is considered non-binding, a small degree of binding is mostly disguised under the confidentiality and disclosure section of the agreement.

7. Cost

This document must explain any cost associated with transactions or the non-binding offer.  

Structure of Non-Binding Offers

A typical Indicative offer should have at least several sections. The following are parts that a letter of Intent must have:

• Section 1: The offeror's details
  This includes the company's name, entity type, business address, and Tax identification.
• Section 2: Property or parcel
  This should be included in the letter of Intent.
• Section 3: Sublease terms
   Proposed total lease term.
• Section 4: Details of the activities undertaken on the Property 
  Per the Key Sublease Terms, activities to be undertaken on a property/ parcel must comply with the permitted uses for that parcel.
• Section 5: Leases and Other Assumptions
  This should include leases, tax, and any other assumptions.
• Section 6: Estimated number of jobs created (Directed and Indirect)
  This document is expected to detail the direct and indirect jobs anticipated by the activities on the Property.   

Differences between a binding and non-binding offer

There is a difference between a binding and a non-binding offer in many aspects.

The table below shows the difference in detail.

On the other hand, the two documents share some similarities. Below are the similarities between the two documents:

1. Both are documents used in the daily operations of business activity. For example, companies worldwide use these documents in various business deals but mostly in mergers and acquisitions.
2. Both documents lay out the transactions' aspirations and terms. In addition, the documents show what the parties aim to achieve in the transaction. 
3. Both documents are used between the buyer and the seller. The non-binding offer, like the binding offers, can be entered into by two parties.

Researched and Authored by Mazyopa Jonathan | Linkedin

Reviewed and edited by Parul Gupta | LinkedIn

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