IOI in M&A: What Is It, How It Works, and Benefits Explained

When selling your business, receiving an Indication of Interest (IOI) can be a great starting point for negotiations that may lead to a successful sale.

But what is an IOI in M&A transactions, what does it entail, and how can it benefit you?

Before we get into the details, it's worth noting that trying to handle an IOI on your own can be challenging and risky. It's advisable to work with an M&A team, including business attorneys.

At Exitwise, we can help you find and work with your dream team of M&A experts who can help you understand the contents and implications of an IOI to sell your business successfully. Connect with our M&A advisor today to get started!

What Does IOI Mean?

An IOI is a preliminary, non-binding document or proposal showing a potential buyer's serious willingness to buy your company.

The IOI is usually structured as a letter the potential buyer addresses to you as the seller, so it may sometimes be referred to as an “indication of interest" letter.

Prospective buyers may also refer to the IOI as an "Expression of Interest”.

Indication of Interest vs. Letter of Intent

IOIs and LOIs (Letters of Intent) are often confused because they are both crucial to the selling of a business, even if some transactions may not include the IOI.

However, some differences between the two documents are:

Aspect	Indication of Interest (IOI)	Letter of Intent (LOI)
Purpose	To gauge the interest of both buyer and seller and initiate discussions on the potential sale	To solidify the terms of the sale, progressing further towards the purchase agreement
Binding Nature and Legal Obligation	Typically, it is not a legally binding document and usually has no legal consequences.	Usually, it is not a binding document, but it may have some binding clauses or terms. A binding LOI may have legal consequences, while a non-binding LOI typically has none.
Content	Contains fewer details, such as a high-level overview of the buyer's proposed purchase terms. Most of the specifics are discussed later in the process.	Builds upon the contents of the IOI and provides more specifics on terms, closing conditions, price, due diligence, financing, exclusivity, and more.
Confidentiality and Exclusivity	May maintain confidentiality for sensitive information and may or may not include an exclusivity, depending on the buyer.	Usually maintains confidentiality to keep the sale undisclosed until both parties are comfortable. Usually has an exclusivity period requested by the buyer to allow for due diligence and further conversations.

An IOI acquisition document usually comes before an LOI in most transactions. The LOI usually comes later, often after the buyer has done preliminary buy-side due diligence.

5 Key Benefits of IOI in the M&A Process

Let’s look at the benefits of an IOI in business:

Ability to Qualify Buyers: You may be able to pre-screen and qualify buyers by evaluating their interest in a competitive bidding process, allowing you to only move forward with the ones that mean serious business.
Managing Expectations: An IOI can help you manage expectations since you can easily see and evaluate the buyer's typically proposed terms and conditions of the deal.
You can Avoid Committing Prematurely: An indication of interest allows you to explore the deal without committing to the deal prematurely. The document is non-binding and typically doesn't create any legal consequence or obligation for either you or the buyer.
May Maximize Value: When you have multiple prospective buyers sending IOIs, the bidding process can be competitive and potentially fetch you a higher sale price or more favorable sale terms.
Kickstarting Due Diligence: An indication of interest can help start the due diligence process. If you haven't done reverse due diligence, you may now do it to discover any concerns the buyer may uncover through buy-side due diligence.

Core Components of an IOI in M&A Transactions

The format of an IOI may vary from one sale to another, depending on the industry, the buyer, and the circumstances surrounding the sale.

Here's what you may find in a typical indication of interest:

1. Introduction

The introduction is often brief because it introduces the buyer, their M&A team, or their representative and their intent to buy your business.

2. Purchase Price

The buy-side may propose a purchase price in a dollar range or a multiple of a business metric like EBITDA.

3. Preliminary Deal Structure

They may propose a deal structure for the transaction, which may be an acquisition or merger. It may also be an asset sale or stock sale.

4. Due Diligence Plans

Typically, the buy side performs due diligence to evaluate if your business is a good fit for them and their interests.

Since it's usually a lengthy process, they may let you know early in the IOI. This would help you prepare to provide the information they may need, such as past tax records and future cash flow projections.

5. Expected Financing

Financing refers to the buyer's source of capital for the transaction. Depending on the buyer, this may be external financing, an earn out, or their own funds.

6. Requirements and Conditions

The buy-side may have some conditions they would like you to meet for the transaction to proceed.

Such requests may include third-party consents, compliance with regulations, certain changes in your business's finances, etc., that may substantially affect the transaction.

7. Expectations for Continued Involvement

If the buy-side wishes to have you, your top management, or key employees remain during or after the sale and transition, they may say so in the IOI.

8. Confidentiality

Your potential buyer or their representative may reiterate the need to protect sensitive information about the sale and their interest during the ongoing negotiations and due diligence.

9. Proposed Timeline

The buy-side may provide a rough timeline and deadline for completing the transaction. They may also indicate key milestones, such as for completing due diligence and creating a Definitive Purchase Agreement if the deal continues.

10. Non-Compete or Exclusivity

When included in an IOI, the non-compete or exclusivity section usually indicates the buyer's request for an exclusivity period during which you promise not to engage with other prospective buyers.

11. Request for Financial Information

The buy-side typically asks for your company's financial information, which may include the quality of earnings and profit and loss statements.

12. Contact Information

The buy side usually includes the contact details of the buyer or their representative to clarify who you or your M&A team should contact about the IOI and other subsequent discussions.

The typical indication of interest usually includes various pieces of information that you can easily miss as the seller.

However, working with experienced M&A experts can help you better understand the IOIs you receive and evaluate each potential buyer before entering deeper negotiations.

Connect with us at Exitwise today so we can help you hire the best M&A experts who can help you secure a high-value exit at favorable sale terms.

How to Create an Effective IOI in M&A

As mentioned, the buy-side usually drafts and sends you an indication of interest — so you typically don't need to create one.

However, it may benefit you to put yourself in the buyer's shoes and learn how they may create their IOI.

Here's the process they may follow:

Understanding Objectives: The buyer may have to clearly define their goals and objectives for the business purchase. It may help them decide if your business is a great fit.
Research: The potential buyer usually gathers information about you and your business and sets the right expectations. You can ask yourself what information the buy-side may find at the IOI stage so you can make predictions.
Highlighting their Strengths: The buyer is usually keen to share their strengths and why they think they are a good fit to buy your business. You may use this section to further evaluate whether they are a good fit.
Summarizing the Transaction: The buy-side may propose the terms and conditions of the purchase. This may give you a picture of what others think your business is worth.
Submitting the IOI Timely: The buyer usually would want to submit their IOI as soon as they feel they could potentially buy your company.

Challenges Associated with Indications of Interest in M&A

You may encounter the following challenges when trying to handle Indications of Interest:

Offering Potential Buyers Limited Information: Although the buyer may have signed a non-disclosure agreement by the IOI stage, the information you send them may lead to incomplete terms that they may need to change during or after due diligence.
Very Low Purchase Prices: If potential buyers value your business inaccurately, you may receive very low proposed purchase prices, making further negotiations difficult.
Limited Ability to Negotiate: When a buyer requests exclusivity, they may limit you from further engagements with other potential buyers. This could limit your negotiation leverage if they propose an unfavourable deal.
Using Binding Language: If you make a strong commitment to work with the buyer at the IOI stage, you may create legal obligations prematurely. This may happen even though IOIs are legally non-binding.
Confidentiality Leaks: Sensitive information about you, the sale, or the buyer may leak during the IOI stage. The deal and your reputation may be compromised.
Poor Regulatory and Legal Compliance: Failing to act according to regulations, such as anti-monopoly laws, can lead to costly legal problems.
Receiving an Unapproved IOI: If you receive an IOI that hasn't been agreed upon by all the buyer's stakeholders, the proposed terms may change, or the deal may fail altogether.
Due Diligence Risks: The due diligence that usually follows an IOI may uncover issues that may cause confusion and disagreements or negatively affect the purchase terms.

Frequently Asked Questions (FAQs)

Let's close the discussion with common questions about IOI in business sales:

Is it Possible to Negotiate After Submitting or Receiving an IOI?

You can negotiate with the buy-side after receiving an IOI because the letter usually kickstarts the negotiations.

However, you may choose not to negotiate if you get a very low purchase price proposal or unfavorable initial terms.

How Can a Business Owner Maximize the Value of their Company when Submitting an IOI?

As mentioned, the IOI typically comes to you from a potential buyer rather than the other way around.

However, you may maximize your company's value by letting multiple potential buyers submit their IOIs competitively.

What is the Typical Length of an Indication of Interest (IOI) Document in M&A?

An indication of interest document is typically 2-5 pages long. Some may be only one page, depending on the buyer, the circumstances of the sale, and industry norms.

Conclusion

Receiving an M&A IOI may be a significant step towards negotiations and a successful business sale. As a seller, you may need an experienced business attorney and other M&A experts to help you evaluate different IOIs.

You can work with us at Exitwise to hire and manage an M&A team that can help you create the successful exit you've always dreamed of. Schedule a no-obligation consultation with us today to get started.