This guide explains what indications of interest are and their role in the M&A process. The goal of this guide is to educate readers about the use and practice of this document. Here are some key takeaways about indications of interest:
An indication of interest (IOI) is a document normally structured as a letter from a prospective buyer that indicates they are interested in potentially buying a business for sale. Indications of interest are meant to convey that the buyer is sincerely interested in getting a deal done based on the limited information they have available. IOI’s are non-binding agreements. In merger and acquisition deals, these documents generally serve as a starting point for negotiations to begin.
Now that we’ve explained what indications of interest are, we’ll look at their role in the M&A process so that you can see how they fit into the deal.
If you work in M&A or you’re looking to sell a business, it’s important to understand both how the M&A process works as well as the documents that will be involved in the deal.
To really have a clear understanding of an indication of interest, we need to see how it fits into the process of selling a business and we need to see how it’s different from other documents in the M&A process.
From the seller’s perspective, once they decide to sell their business, they normally seek out an intermediary to help facilitate the deal. It’s important for this intermediary to have experience working on deals of this size as well as professional working relationships with multiple buyers that have the ability to make offers on businesses of this size and that are actively searching for acquisition targets.
With the help of their intermediary, accountant, and attorney, they will prepare several documents. The first is a teaser. This is a short document that gives prospective buyers high-level insights into the nature of the business for sale and its financial performance. The teaser also keeps the seller’s identity anonymous. The basic idea is that prospective buyers can see high-level information up front and decide if it’s a business they might be interested in acquiring. If they are interested in learning more about the business for sale based on what they’ve learned in the teaser, they will sign a non-disclosure agreement, in exchange for another document called a confidential information memorandum (CIM), This document has more information than the teaser and it goes into more detail about operations, the business model and financial statements.
With the information in these documents, prospective buyers normally attempt to value the business based on the information they have available to them (which is incomplete). At this point, the prospective buyer is interested in a potential deal and prepared to buy the business for sale. However, the seller still has asymmetric understanding of their business compared to the seller. The seller really only knows what they’ve learned through these documents. Before a final deal is made, the buyer and seller will negotiate on a price and the terms of the deal, and the buyer will conduct due diligence. Due diligence is the process where the prospective buyer goes to the target business and observes operations. They attempt to learn as much about the business they are buying as possible during this phase. You can learn more about the due diligence process here. If the prospective buyers are satisfied with what they learn in the due diligence process, then they move forward and close on the deal.
Before we can get to this point, we have the negotiation phase of the M&A process. This is where the indication of interest comes into play. After the seller reviews the teaser and CIM and attempts to value the business based on the financials they have, they will approach the seller about a potential deal. The way they typically start this process is by drafting a formal letter to the seller outlining an initial offer. This letter, called an indication of interest, is a non-binding document, used as a starting point for negotiations. In these negotiations, the buyer and seller will agree on a price and the terms of the deal—pending due diligence. From here, the buyer will draft another letter to the seller, called a letter of intent (LOI). The letter of intent is a partially-binding document which is for the most part, typically non-binding, except for the fact that it gives the prospective buyer a period of exclusivity with which to conduct their Due Diligence of the business.
Once the LOI is signed by both parties, we end the bid process, giving the buyer time to conduct this due diligence.
Here, we’ll briefly clarify the difference between letters of intent and indications of interest as these documents are somewhat similar and often confused.
An indication of interest is a non-binding document expressing a prospective buyer’s sincere interest in doing a deal with a seller. The indication of interest is written before the negotiations start and it attempts to outline what a prospective buyer might be willing to offer for a business provided things work out. The indication of interest is how negotiations in an M&A deal typically start. Up until this point the prospective buyer and the seller have normally not met each other yet. During the negotiations the buyer and seller have the opportunity to negotiate on the purchase price and the terms surrounding the deal.
Conversely, the letter of intent is typically how these negotiations end. Most of the contents of the letter of intent are also typically non-binding, however, they are reflective of several rounds of negotiating. An LOI is a serious offer from the buyer, however, this offer is still pending the buyer's due diligence. We call LOI's partially binding documents because we agree to a binding period of exclusivity allowing the buyers some time to conduct this due diligence (usually somewhere around 90 days).
So, the deal doesn’t officially close here. We still have to address the fact that the seller still has asymmetric knowledge about their business compared to the seller. Next, the due diligence phase will begin. After due diligence, the deal will close with a definitive purchase agreement. This purchase agreement is the final, binding contract between the buyer and seller.
Now that we’ve discussed what an indication of interest is in an M&A deal and we’ve seen its role in the M&A process, we’ll look at what is typically included in an indication of interest.
While every deal will naturally involve unique elements, the following elements are normally included in an indication of interest. Remember, this document is designed to express the prospective buyer’s sincere interest in acquiring the seller’s business.