As you move forward on your journey as an acquisition entrepreneur, you might come across the term Indication of Interest (IOI).
What does it mean, and how is it used?
Although it sounds very similar to Letter of Intent (LOI), which is what people most commonly hear about, an LOI and IOI are not the same thing.
In this post, we’ll discuss what an IOI is, its purpose, how it’s different from an LOI, and when it’s appropriate to use an IOI.
What Is an IOI and How Is It Different From an LOI?
The textbook definition of an IOI is a “formal, yet non-binding letter or document expressing interest in purchasing either a company or company’s securities.” In other words, an IOI is a buyer’s way of indicating preliminary interest in a seller’s business and, more importantly, expressing his or her intention to make a formal offer if all goes well.
- Approximate price range
- Buyer’s availability of funds and sources of financing
- Assumptions that need to be met to move onto due diligence
- Items needed for due diligence and rough estimate of timeline
- Potential proposal of deal structure
- Role of owners post-close
- Timeframe to close the transaction
On the other hand, an LOI is a non-binding document, submitted in good faith, outlining proposed price, expected closing date, a period of exclusivity to allow the buyer to perform due diligence without competitive pressure, and any other terms. This is a way for the buyer to “lock down” a seller, so to speak, with the very real intention of purchasing the business if there are no major hiccups during due diligence.
To put it in layman’s terms…
The difference here is an IOI is saying,
“I’m a serious buyer who’s very interested in your business, and these are the terms under which I’d be willing to place an offer on your business.”
An LOI, on the other hand, is saying,
“I’m a serious buyer who’s very interested in your business, and I am willing to pay X and agree to Y terms, if due diligence goes well.”
An IOI can be used as a roadmap to the offer, and an LOI is used as a roadmap to the purchase agreement.
When Should an IOI Be Used (Or Avoided)?
A buyer and seller begin their formal relationship together upon the submission of an LOI. An LOI is used in every deal and is typically the buyer’s first step toward purchasing a seller’s business. That said, an IOI is not always used in the process, and it is only used in occasional instances.
IOIs are used when dealing with proprietary deals, or off-market deals where you have the chance to purchase a company before any other dealmaker. These deals are the opposite of intermediary-sourced deals, represented by brokers who create packages or Offering Memorandums (OM) to advertise the relevant information you need to know about a business before making an offer.
Why would you be handling proprietary deals?
If, as a buyer searching for a business to purchase, you’re conducting individual outreach to business owners who may be ready to sell, you will come across deals that aren’t yet advertised. Similarly, there is no broker guiding you or the seller through the process, and there isn’t an OM providing you with the initial relevant information you need to make the decision to submit an offer.
Because there may be more critical information you need to review before you’re comfortable putting a number to what you’re willing to offer for a seller’s business, an IOI is the step before the LOI. The IOI is your way of telling the buyer,
“Listen, I know enough about your business that I’m interested, but I don’t want to tie you up in a binding agreement if I’m not yet sure how much I’m willing to offer for your business. I think your business could be worth X, but I need to learn more before I am willing to make that a formal offer.”
When to Not Use an IOI
This is why when Acquisition Lab members ask me about IOIs, I usually steer them away from them. Most of the deals our members look at are intermediary-sourced, which defeats the purpose of using an IOI. In these cases, searchers have enough information about the business and its financials to go straight ahead and submit an LOI.
Additionally, from the seller’s point of view, the IOI can be a way to warm up the seller to the idea of selling their business. In intermediary-sourced deals, the sellers are already selling their businesses, so there’s no need to soft sell them on the idea to sell their business; it’s redundant to do so.
When to Use an IOI
That being said, strategically using IOIs, even in intermediary-sourced deals, can help you get a better LOI. I had one Acquisition Lab member who used an IOI in an intermediary-sourced deal who did just that.
This searcher had already combed through the OM on a business, but there were still a few items remaining he needed to see before feeling comfortable submitting an LOI. The IOI he submitted was his way of saying,
“I’m very interested, and I think I’d be willing to pay you full price. That said, I would like to review items X, Y, and Z, and I’m willing to review them within a week. In a week, if all checks out, I would be comfortable offering full price for your business.”
So he used an IOI to ask for the additional information, agreeing to take a finite period of time to review the material and put down an offer if the new information didn’t highlight any unexpected issues. Although it wasn’t a binding agreement, the way he utilized the IOI demonstrated good faith and his seriousness to move forward on the seller’s business if the seller was willing to share more information with him.
From the seller’s side, an IOI can help a seller understand which buyers have a value proposition in mind, and it allows the seller to separate the wheat from the chaff, especially if the seller is dealing with a lot of tire kickers.
There are specific instances in which you should use an IOI before an LOI or only submit an LOI.
Even though an IOI is non-binding, it’s not a casual offer, since so much work can go into compiling one. An actionable IOI will give the seller sufficient information to make a decision, one way or another, about moving forward with you as the buyer.
If you’d like help understanding which documents, contracts, and tools you’ll need to smoothly navigate your acquisition process, reach out to us.
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