IOI vs LOI
Indications of interest and letters of intent
Understand the difference between early interest and a developed proposal, then compare price, funding, exclusivity and the path to closing.
Overview
An indication of interest (IOI) helps test whether a potential buyer and seller are broadly aligned. A letter of intent (LOI) usually develops the proposed terms and process in more detail. Neither is a completed sale or proof that funding is secured.
Three takeaways
- Compare the proposals on the same basis: enterprise or equity value, included business or assets, ownership percentage and the assumptions behind the price.
- Separate closing cash from rollover equity, seller financing, escrow and contingent payments. A higher headline value may carry less closing cash or more risk.
- Review funding evidence, remaining approvals and legal obligations before exclusivity. Interest in funding is different from a binding commitment.
Considerations
- These are typical U.S. private-company M&A practices, not fixed rules. Some processes skip the IOI; documents may be called a term sheet or another name.
- Terms, conduct and applicable law determine legal effect. A nonbinding heading alone does not settle confidentiality, exclusivity, expenses or duties to negotiate.
- Before limiting other buyer discussions, assess readiness and discuss duration, permitted contacts, extensions and termination rights with counsel. Track diligence, financing and draft-document milestones.
Outcomes depend on the business, market conditions and negotiated documents. Consult your legal and tax advisers about your circumstances.
Six dimensions to compare
| What to compare | IOI: Indication of interest | LOI: Letter of intent |
|---|---|---|
| Main purpose | An early expression of interest, often used to decide which buyers advance. | A more developed basis for diligence and negotiation of definitive agreements. |
| Price | Often a preliminary value or range, subject to further information and assumptions. | Typically a more specific price or formula, with proposed adjustments and payment terms. |
| Structure and payment | May outline the broad transaction structure; material details may remain open. | Should distinguish closing cash, rollover equity, seller financing, escrow and contingent payments. |
| Funding and diligence | Ask about intended funding sources and what the buyer still needs to learn. | Clarify financing conditions, remaining approvals, diligence scope and the proposed timetable. |
| Exclusivity | Often used to compare interest before choosing a preferred buyer; exclusivity is not inherent in the label. | Often includes a negotiated period limiting other buyer discussions. Review scope, expiry and extensions. |
| Legal effect | Usually preliminary and nonbinding. Review wording and existing confidentiality obligations. | Deal economics are commonly nonbinding, while specified process terms may bind the parties. Counsel should identify which. |
How an IOI can develop into an LOI
Illustrative example: an IOI indicates a $28 million to $32 million enterprise value. A later LOI proposes $30 million. The upper end of the IOI was not a promised price.
Assume no cash is credited to the seller, $4 million of debt is repaid, seller expenses are $1 million and the working capital adjustment is zero. The $30 million enterprise value less $4 million of debt and $1 million of expenses leaves $25 million before personal taxes and other adjustments.
If $5 million is rolled into equity and $1 million is held in escrow, cash released at closing is $19 million. Rollover remains invested and escrow release is conditional. These figures illustrate arithmetic, not an expected outcome or forecast.
Resolve the important terms early
- What business, assets and ownership percentage does the proposal cover?
- What assumptions drive the price range, and is it enterprise value or equity value?
- Who supplies equity and debt, and what evidence supports the buyer's ability to proceed?
- What are the owner's future role, material conditions, expected liabilities and expenses if the transaction stops?
Background reading
Listed for further reading, not as endorsements.
- BDO, "IOI through closing"
- Wyrick Robbins, "The basics of an M&A LOI"
- Bean Kinney & Korman, "Do you need an LOI"
- International Bar Association, "Preliminary agreements"
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.