IOI vs. LOI: How They Impact Business Sale Process

Understanding the difference between an IOI (indication of interest) and LOI (letter of intent) is crucial in an M&A deal. The two are key milestones in the M&A process but vary significantly in timing, purpose, and legal implications.

This IOI vs LOI comparison dives deeper into their differences and similarities and how they can impact your business sale.

TL;DR - Indication of Interest vs. Letter of Intent

Let's start with a quick overview of the pros and cons of each document:

IOI	LOI
An early-stage, typically non-binding proposal or document that shows a potential buyer's willingness to buy a business.	A document from a potential buyer or their representative to a business seller to show greater interest in buying a business.
Pros	Pros
Reduces legal and financial commitments for both buyer and seller. Provides a non-obligatory way to gauge buying intent and buy-side valuations of your business. Requires less legal guidance.	Better than IOI at establishing good faith between you and the potential buyer. Gets you much closer to a successful deal since it's typically submitted after basic negotiations and preliminary due diligence. Provides a more formal outlook and commitment.
Cons	Cons
May lead to wasted effort since both the buyer and seller aren't obligated to commit. Timelines for the transaction may be too loose.	Requires more legal guidance, even if it may be non-binding. May keep you from engaging other potential buyers if the buyer asks for exclusivity.
Best For	Best For
Sellers looking to pre-screen and qualify potential buyers based on interest and preliminary purchase price offers.	Sellers ready to formalize deals and work committedly towards a definitive purchase agreement.

Whether you are reviewing an IOI or LOI, you'll need legal help from M&A attorneys to understand the contents and verify that they are written according to standards.

However, the entire M&A process requires more than legal experts. You'll need financial accountants, investment bankers, and wealth advisors to help you with other aspects of the sale.

We at Exitwise can connect you with the top M&A experts in your industry to help optimize your business sale. Reach out to our team today to hire the best M&A attorneys and other experts for a successful sale.

What Is an IOI?

An IOI or Indication of Interest is an early-stage, typically non-binding M&A document that shows a potential buyer's willingness to buy your business.

Since it's structured as a letter, the IOI is also called an Indication of Interest Letter.

The IOI is typically non-binding, but some may be legally binding, depending on the buyer.

Components of an IOI

An IOI typically includes most or all of the following components:

An introduction of the buyer, their representative, or M&A team
Declaration of their interest in buying your business
Proposed purchase price and type of M&A financing
Proposed deal structure, such as a stock sale or assets sale
Due diligence plan, which can include the information they would need you to provide
The conditions and requirements they would like you to fulfill before proceeding, such as securing third-party consent for the sale
Indication of whether they want you or your team to continue working in the business after the sale
A confidentiality clause to safeguard information about them and the sale
Proposed timeline and deadline for closing the transaction
An exclusivity clause, in case they want you to not engage other potential buyers for a specified period
Contact details of the buyer, their representative, or point of contact in their M&A team

When Is an IOI Used?

An IOI suffices in the following situations:

When qualifying buyers, so you can go forward with the more serious ones.
When you don't want to commit to the deal prematurely but want to explore possibilities with multiple buyers.

What Is an LOI?

A Letter of Intent or LOI is a buy-side document written by a potential buyer, their representative, or their M&A team to a business seller to show greater interest in buying your business.

Like the IOI, an LOI is a letter addressed to you, your representative, or the M&A team.

An LOI may be legally binding, depending on the buyer's specifications, and is called a binding LOI.

Components of an LOI

Depending on the deal and buyer, an LOI may have most or all of the following elements:

Introduction and contact details of the buyer, their representative, or M&A team
Declaration of intent to buy your business
Description of the terms and conditions for the sale, such as proposed purchase price and payment procedures
Timelines and deadlines for the sale and different milestones, such as due diligence
Conditions you need to fulfill before they proceed with the process
Confidentiality agreement clause, if they also need you to sign a non-disclosure agreement
Due diligence plan
Explanation of whether the letter is binding or non-binding
Consideration for retaining you or your employees after the sale
Responsibility and distribution of the cost of the transaction
An exclusivity clause, in case they don't want you to work with other potential buyers for a specific duration
Signatures of the buy-side and room for signatures from the sell-side stakeholders

When Is an LOI Used?

An LOI is typically used after an IOI and preliminary due diligence to indicate a more profound interest in buying a business.

In the typical M&A pipeline, the LOI follows critical documents such as teasers, IOI, M&A NDA, and Confidential Information Memorandum.

An LOI may be directly used in cases where the buyer is strongly confident in making a direct offer before an IOI and early-stage due diligence.

IOI vs. LOI Key Comparison

Let's consider an indication of interest vs. letter of intent side-by-side comparison:

	IOI	LOI
Purpose	Checks the early-stage interest in the buyer and their valuation range of your business.	Cements the terms of the business sale, getting both parties closer to a purchase agreement.
Timeline	Comes before the LOI in typical M&A processes.	Comes after the IOI and typically after the buyer signs an NDA and completes preliminary buy-side due diligence.
Content Detail Level	Fewer details, as specifics come later. Primarily includes the buyer's interest declaration and proposed purchase terms.	More detailed as it builds up on the contents of the IOI. Includes declaration of intent, proposed purchase price, due diligence, closing conditions, financing, and more.
Commitment	Neither you, as the seller, nor the buyer need to commit to the deal in these early stages.	The buyer has shown great commitment, and you can reciprocate if there's an exclusivity clause and you are satisfied with the deal terms.
Binding Nature	Typically not legally binding unless the buyer specifies so.	Typically not legally binding but may have binding clauses.
Bid Structure	The bid is typically a price range rather than a specific number. The buyer offers a specific figure later.	The bid is typically a specific purchase price figure. The buyer may refine the figure based on their due diligence findings.
Confidentiality and Exclusivity	May root for confidentiality for the buyer's and seller's information and the sale itself. The buyer may or may not ask for exclusivity.	Maintains confidentiality better because the buyer signs an NDA. The buyer typically asks for exclusivity.

IOI and LOI Differences

Now that we’ve discussed both documents, let’s highlight the various differences between IOI and LOI:

Commitment Level: The LOI requires more commitment than the IOI from both the buyer and the seller, especially if there is exclusivity.
Detail Level: LOIs are more detailed than IOIs as they dig deeper into the specifics of the aspects raised in the IOI.
Timing: The IOI comes early and is usually the first inbound document in the bidding process, while the LOI comes later as a secondary part.

IOI and LOI Similarities

Although quite different, an IOI and LOI also share certain similarities:

Purpose: Both letters set out the initial intentions of the buyer and line the base for further negotiations.
Openness in Binding Nature: Both IOI and LOI are legally open-ended in that they may or may not be legally binding. If legally binding, the buyer states so outright. Also, only a few sections may be legally binding, such as the exclusivity and confidentiality clauses.

Important Seller Considerations at Each Stage

When reviewing IOIs, you may want to consider the following:

Extreme Exclusivity Durations: The buyer might be more serious if they ask for exclusivity, but ensure you agree on the specified duration.
Late Submissions: Submitting an LOI late without a satisfactory explanation can be a sign of a lack of professionalism or seriousness.
Post-Submission Follow-ups: An excellent buyer may follow up after the submission to confirm receipt and express their continued interest.
Low Price Ranges or Missing Critical Details: A very low purchase price range or missing crucial details can be a red flag that suggests lower commitment or seriousness.

Once you hit the LOI stage, consider the following:

Due Diligence Process Preparations: You should prepare thoroughly for both reverse and buy-side due diligence. Use reverse due diligence to uncover issues that may put off the buyer.
Additional Exclusivity Risks: Agreeing to work with one buyer at this stage can be risky. Ensure you have done enough due diligence on the buyer and concluded they are highly likely to follow through with the purchase.
Binding Clauses: Ensure you clearly understand and agree with the binding sections to avoid potential legal proceedings if you don't honor them or the deal flops.

What About Purchase Agreement?

The purchase agreement is the final contract that outlines the terms and conditions of the sale. Typically drafted by the buy-side, the agreement comes after the LOI and in-depth due diligence.

Depending on the deal, the purchase agreement may be called a Sales and Purchase Agreement (SPA), Definitive Purchase Agreement (DPA), or Share Purchase Agreement (SHA).

The purchase agreement builds more on the details in the IOI and LOI. Details can include the following:

Business and assets being purchased,
Purchase price,
Payment terms,
Reps and warranties,
Post-closing integration, and
Purchase price allocation.

Seeing that the IOI, LOI, and purchase agreement originate from the buy side, you'll want to take your time reviewing them.

However, reviewing them alone can be overwhelming, so a dedicated M&A attorney and other experts can be extremely helpful.

At Exitwise, we can connect you with the best M&A attorneys and other experts in your industry to help you sell your business within an agreeable time and at the best sale price.

Chat with our team today to optimize your business exit.

Frequently Asked Questions (FAQs)

Here are some common IOI vs LOI questions to wrap up:

Can You Go Straight to an LOI without an IOI?

Yes. Not all M&A transactions include the IOI.

If the buyer is highly confident, they may make a direct offer using an LOI, skipping the IOI stage.

Can an LOI or IOI Be Withdrawn?

Both LOI and IOI can be withdrawn if the buyer wishes or if both parties agree to do so if the process no longer favors them.

How Long Does It Take to Move from an IOI to an LOI?

The transition time from an IOI to an LOI can vary significantly from one deal to another, depending on the parties involved and the complexity of the deal.

Conclusion

Both IOI and LOI are key business sale documents, and you want to deal with them properly to ensure a successful business sale in the shortest possible time.

Besides M&A attorneys, you'll need other experts to help you value your business and sell it at the best possible terms.

When you work with us at Exitwise, we help you find and work with top M&A experts specializing in your industry.

Consult with us today to hire the best M&A attorneys and other experts to help you achieve the exit you've always imagined.