An Indication of Interest (IOI) is an important document for businesses for sale. An IOI is a non-binding offer submitted to Seller to indicate the valuation in general terms that the Buyer would pay. This valuation is usually expressed in a dollar range by the potential Buyer. Obviously, IOIs may have a different order for paragraphs and information but generally an IOI contains the following information.

Please note that Target refers to the company that is being bought or bid on. Seller refers to owner of the Target.

• First Paragraph
  • General intro paragraph says that the preliminary offer is based on information provided. It also usually provides some niceties for the current management team – they are a strong, capable team and says how excited the Buyer is about the opportunity. Some Buyers (especially PE firms) will also highlight how the targeted company fits with its overall investment focus or strategy.
  • A Seller will see a reference to whether it’s a stock or an asset deal since the deal type has tax implications and thus affects the amount after-tax that the Seller receives.

• Second Paragraph
  • This paragraph is typically a valuation discussion. Items discussed and quantified include total consideration to be paid for the Target and % control for the Buyer. Usually the language will also highlight that the consideration to be paid is based on the Target being debt fee and the Buyer receiving adequate working capital.

• Third Paragraph
  • Most Buyers will try to have some part of the total consideration be contingent. Generally, there will be a paragraph to explain at a summary level how the contingent portion works.
  • In addition, the Buyer will also highlight the equity incentives it will put in place for existing management. For example, a Buyer may state that it expects to have a 15% option pool available for the existing management team. Buyers want to show that they are willing to incent the management team and provide it with upside. This is a common retention mechanism.

• Fourth Paragraph
  • A Buyer will state (if it hasn’t already) that the offer is not legally binding and subject to due diligence findings and execution of senior management agreements, etc. Basically, the Seller can’t hold the Buyer to this offer. It’s just a Buyer expressing a potential interest and an estimate of what the Buyer thinks it would pay. However, the Buyer certainly will need more information to reach a final, solid number regarding its offer.

• Fifth Paragraph
  • Ok, now that the Buyer has specified how much it’s willing to pay upfront for some ownership percentage as well as how much potential contingent consideration it’s willing to pay, it’s now time for the Buyer to identify potential key issues that it will need resolved for its final valuation. Remember an IOI is only an indication so a Buyer may revise its offer based on the information it receives during due diligence.
  • Sellers also like to know timelines for closing the Transaction as they obviously do not want a drawn out process. Therefore, Buyers will often specify a timeline to deliver a Letter of Intent (LOI) and conduct due diligence. Most of the time Buyers will say 30-60 days. Even if a Buyer says 30, it most likely will be longer. It’s just trying to say what the seller wants to hear.

• Sixth Paragraph
  • If Buyers plan to use the Target as a platform for growth, then it may specify how much money it’s willing to allocate to the initiative (also referred to as a platform). For example, a Buyer may allocate $25 million to an initiative but only be spending $10 million on a Target. This is because the Buyer expects to find other companies to add to the Target. Some Sellers find this appealing because they want to run larger companies.
  • Some Buyers will have another paragraph that restates how excited it is about the opportunity as well as note its past successes in the industry. In particular, if the Seller is also part of the management team and will be staying on post-Transaction, then it’s important for the Seller to feel comfortable that the Buyer has the expertise necessary to continue to grow and add value to the Target.

• Seventh Paragraph
  • If there is a seventh paragraph, it may be an overview of the Buyer – just some background and items denoting that is reputable and legitimate Buyer for the Target.

• Eighth Paragraph
  • Yes, lawyers have Buyers worried about things being legal binding so some Buyers will take a chance to once again reiterate that the offer is non-binding as well as note that the Seller must keep the identity of the Buyer and the terms of the offer confidential.

Stay tuned for our indication of Interest example that will be posted shortly.