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What to Expect From the Indication of Interest (IOI)

In this article, we’ll discuss the Indication Of Interest (IOI), a written document prepared by the buyer and submitted to the seller for review as part of the acquisition process. However, before we get started, you may want to review some of Axial’s articles: We’ve assembled topics ranging from leveraged buyouts to choosing an investment bank to responding to unsolicited offers, among other important subjects regarding lower middle market M&A transactions.

You may have heard the term, “IOI”, but you’re not quite sure what it means. Maybe you’ve also heard of a similar, but different term, “LOI” (letter of intent), and you’re not so clear as to the differences between these documents and their respective purpose during the M&A and transaction process. So, let’s demystify all of this.

What’s an IOI? An IOI is a non-binding formally prepared letter written by a buyer and addressed to the seller, whose purpose is to express a genuine interest in purchasing a company. Among other things, an IOI should provide guidance regarding approximate target company valuation, and it should also outline the general conditions for getting a deal done. Elements of a typical IOI often include but are not limited to:

  • Approximate price range; can be expressed in a dollar value range (i.e. $10-15 million) or stated as a multiple of EBITDA (i.e. 3-5x EBITDA)
  • Buyer’s general availability of funds and sources of financing
  • Necessary due diligence items and a rough estimate of the due diligence timeline
  • Potential proposed elements of the transaction structure (asset vs equity, leveraged transaction, cash vs equity, etc.)
  • Management retention plan and role of the equity owner(s) post-transaction
  • Timeframe to close the transaction

Of course, there are often other items that a buyer includes in an IOI, but in general, you should see some of the above bullet points in one. Think of an IOI as the very first written offer for your company. It’s usually based on limited information—the buyer typically hasn’t had a chance to visit your company and conduct any serious due diligence—the only extensive amount of information that has been shared is usually the information / offering memorandum. One of the goals of an IOI should be to help weed-out “tire kickers” and ensure that you only invest time and resources with buyers that value your business within your range and that have adequate industry expertise to understand inherent risks and opportunities that the business has. This is particularly important if your company has many buyers expressing interest as it helps determine the most credible ones.

Now, onward to the differences between an IOI and an LOI…

The LOI is a more formal document than the IOI and outlines a final firm price and deal structure for your company. Instead of offering a general price range, the LOI gives the final bid for the company in absolute dollar terms or as a firm multiple of EBITDA. Importantly, the LOI is also the point at which buyers seek to lock up your company for an exclusive period of time in which the buyer can conduct a full due diligence process before purchasing the company. If you accept and execute the LOI, it also prohibits you as the seller from speaking with other buyers, whereas, an IOI doesn’t.

Keep in mind that your company doesn’t necessarily need to receive an IOI before receiving an LOI. There are plenty of instances in which a buyer might submit an LOI without having submitted an IOI prior. This is especially true when a buyer is comfortable enough in submitting a firm offer for your business. It may also be the case that you’re working with an investment banker that prefers to go straight to the “LOI stage” of the deal process and bypass the IOI stage which typically follows the signing of NDAs or confidentiality agreements.

The important thing to remember is that there are many ways to getting a deal done. Some deals obtain IOIs where other ones just receive LOIs. The IOI, while non-binding, helps sellers refine their buyer list, compare buyers’ terms, and review a summary of the buyers’ intent.  The IOI, though, is exactly what it says — an indication of interest — and by no means is it a guarantee that a given buyer will progress through the entire transaction process.

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