IOI vs LOI in an M&A Transaction

While an initial flurry of buyer interest can create an illusion of a quick finish, translating that enthusiasm into firm commitments is a crucial, yet intricate, stage in an M&A transaction. However, these phases require astute decision-making, careful interpretation of proposals, and navigating the ever-present tension of a competitive landscape.

While their names hint at their function, understanding the nuances of both an IOI and an LOI is critical for a successful transaction.

Resource: The Transaction Abstract Podcast on IOIs and LOIs

Indication of Interest (IOI): A Buyer's Initial Inquiry

At its core, an IOI expresses a buyer's willingness to purchase your company. However, this statement comes with significant qualifications:

• Limited information: Both parties have exchanged basic information about the business before the IOI arrives.
• Informal: It's usually a brief document outlining the basic terms of a potential deal, such as the purchase price and preliminary thoughts on structure. The price could be expressed in a range or stated as a multiple of EBITDA.
• Early stage: An IOI typically occurs early in the M&A process, often before due diligence has begun.
• Purpose: The primary purpose of an IOI is to see if there is alignment in initial values between a buyer and a seller.
• Non-binding: An IOI is generally not legally binding.

Letter of Intent (LOI): A Deeper Commitment from the Buyer

An LOI signifies a more serious buyer intent than an IOI. It goes beyond mere value proposition and reveals quite a bit more information:

• Exclusivity: An LOI usually includes an exclusivity period to allow for more in-depth conversations and diligence so both sides can get to know each other at a greater level of detail.
• Substantial effort: The buyer has likely conducted preliminary due diligence. They may have also done activities like a facility tour or meeting with management.
• Greater detail: The LOI may outline more specific information related to high-level rationale, price, terms, timeline, remaining diligence, plans for management teams, financing, working capital, exclusivity period, closing conditions, and approvals.
• Solidified terms: The LOI is often used to establish the framework for a draft purchase agreement or term sheet.
• Comparables: In a competitive process, each LOI serves as a tool for the buyer to differentiate themselves.
• Legal implications: Although an LOI is not generally a legally binding document, it may contain some binding terms. 

Downloadable Resource: Guide to Selling a Business

Navigating Competitive Tension: Choosing the Right Buyer

Different types of deals lend themselves to different IOI and LOI scenarios. For instance, in a strategic buying situation there could be a single LOI to be considered. On the other hand, in a competitve broker process a seller is hoping their business will attract lots of interest and multiple LOIs. However, a scenario like this can be overwhelming and rushing into a decision based solely on the highest offer could be detrimental. Things to consider include the buyer's due diligence requirements, their timeline, and their plans for the company. Accepting an LOI shifts leverage to the buyer. Ensure your advisors protect your interests during this critical decision-making phase.

Your advisor team can help navigate the complexities of LOIs and secure the best outcome for you. They provide expertise in interpreting and structuring LOIs and exclusivity provisions. They can help safeguard you from unforeseen changes. In addition, an M&A attorney should review all documents so your rights are protected from a legal standpoint.

In essence, an IOI acts as a starting point for an M&A transaction, while an LOI represents a more serious commitment from both parties.