Evaluating an Indication of Interest
A guide for business owners
A practical checklist for assessing an early offer and deciding which buyers should advance.
Overview
An Indication of Interest (IOI) usually presents an early price or range based on limited information. Use it to assess alignment and decide whether further discussions are worthwhile. A preliminary price can change as the buyer learns more.
Three takeaways
- Ask every buyer to use the same definitions and identify unresolved terms as open. An omission is not agreement.
- Compare economics, execution risk and fit together. The highest preliminary price alone does not establish the strongest path forward.
- Test funding evidence, remaining approvals and the work needed for an LOI. Distinguish a financing discussion from an approved commitment.
Considerations
- If earnings adjustments drive valuation, clarify the expected Quality of Earnings (QoE) work and what findings could change the offer.
- An IOI is usually intended to be nonbinding, but its title does not decide legal effect. Have counsel review wording and any confidentiality, exclusivity or expense obligations before signing or relying on it.
- Advancing a buyer does not itself require exclusivity. If requested, evaluate that separately with a defined scope and timeline.
Structures and outcomes depend on the business, counterparties and definitive documents. Consult your legal, tax and accounting advisers.
Test the assumptions behind the offer
| Review area | What to ask | Why it matters |
|---|---|---|
| Valuation basis | Is this enterprise value or equity value? What earnings period, adjustments and multiple support the range? | Ask what supports the upper end and what would reduce the price. Align the assumptions before comparing offers. |
| Scope and payment | What ownership percentage, assets and liabilities are included? What is cash, rollover, seller financing or an earn out? | A headline number may include value that remains invested, is paid later or depends on future results. |
| Funding and approvals | Who supplies the equity and debt? What evidence is available, and which investment or lender approvals remain? | Distinguish a financing discussion from an approved commitment. Identify conditions and any funding gap. |
| Diligence and timetable | What information is needed to refine the offer? Who makes the decision and when would the buyer submit an LOI? | Look for a credible work plan with clear responsibilities. Treat speed claims as something to substantiate. |
| Owner and management fit | What role would the owner have? What is the plan for leadership, employees, locations and future investment? | Commercial and personal objectives should be discussed early, especially if the owner keeps equity or remains employed. |
Illustration: headline value versus cash
Two buyers each indicate $30 million of enterprise value. Assume each acquires 100% of the business, no cash is credited, $4 million of debt is repaid, seller expenses are $1 million and the working capital adjustment is zero. The remaining amount is $25 million before personal taxes and other adjustments.
Buyer A proposes $25 million in closing cash. Buyer B proposes $18 million in closing cash, a $4 million seller note and $3 million of rollover equity. Both sum to $25 million, but timing, credit exposure and future liquidity differ.
The seller note may not be repaid and rollover equity may lose value. Buyer A's proposal is still conditional on diligence, financing and definitive agreements. These are hypothetical terms, not expected proceeds or a recommendation between offers.
Advance, clarify or pause
- Advance when economics and objectives are broadly aligned and the buyer has a credible plan for the next stage.
- Seek clarification when the price range is wide, funding is vague or material terms are missing.
- Pause when the buyer cannot explain its assumptions or seeks sensitive access without an agreed process.
A concise response to the buyer
Thank you for the indication. Before we determine next steps, please clarify the valuation basis and key assumptions, proposed payment mix, funding sources and remaining approvals, and the work required to submit an LOI. Please also outline your intended role for management and your proposed timetable.
Background reading
Listed for further reading, not as endorsements.
- BDO, "Selling a business: indicative offers"
- Morgan & Westfield, "Submitting an IOI"
- BDO, "Due diligence and QoE"
- Wyrick Robbins, "Preliminary terms and legal effect"
For information only. This material is not an offer or solicitation, or legal, tax or investment advice. Structures and terms depend on the business, counterparties and definitive documentation.