Both an IOI (Indication of Interest) and LOI (Letter of Intent) are bid documents in an M&A process, so what’s the difference between an IOI vs. LOI?

IOIs are non-binding documents that typically come earlier in the M&A process, while an LOI comes later in the process, may contain some legally-binding clauses, and more clearly outlines the proposed deal terms while expressing both parties’ interest in consuming a transaction.

Indications of Interest (IOI) Overview

IOIs are generally used in a deal process to signal serious intent to proceed with a transaction. They are customary following early diligence, when it becomes time to identify and proceed with serious potential buyers.

In a standard two-step auction process, the IOI phase is considered the first step. Sell-side bankers running the process will require buyers to submit IOIs outlining proposed terms and an initial purchase price range. Those selected, at discretion of the seller and their advisory team, will be allowed to move forward into the second step of the process.

What’s Included in an IOI?

Items included in an IOI vs. LOI vary across banks and auction processes, but the following points are largely standard in any banked M&A process. Guidance on which points to include in any given IOI will come in the form of a process letter from the sell-side bank.

• Proposed Purchase Price — This can take the form of either a single value (point bid) or a range (e.g. $650 – $700M). It is most common for banks to request a valuation range at this stage.
• Proposed Transaction Structure — Generally a reasonably high-level overview, including a description of any proposed earnout structure.
• Sources of Funding — Bankers will ask for an overview of funding sources, including the mix of debt vs. equity and required approvals for each. Occasionally, in the case of financial sponsors, the banker will request a full sources & uses table.
• Remaining Diligence Items and Timeline — Buyers will need to provide detail on their required diligence prior to close, often with an accompanying timeline. This typically includes things such as remaining business diligence, legal diligence, insurance & benefits, quality of earnings (QoE) or other financial diligence, environmental, background checks, and customer calls.
• Go-Forward Roles for Senior Management — A description of the plan for existing senior management post-transaction. Options include continuing without change, joining an existing organization’s reporting structure, or departure and potential replacement. This section may also outline management equity incentive plans, if available.

Receipt of IOIs

After receipt of IOIs, bankers will contact parties and invite them to move forward into the next round. For parties that fell short in a certain area vs. competing buyers (purchase price, perceived certainty to close), there may be an opportunity to submit a revised bid.

Post-bid, the field of buyers is typically narrowed from a broad group to something more manageable, consisting of the most serious parties at the highest values. From here, buyers will move forward into full diligence, kicking off full spend with third-party advisors. They’ll likely also have an opportunity for face to face time with target management in a management presentation (and accompanying dinner).

Letter of Intent (LOI) Overview

At some point following IOIs, bankers will typically circulate an updated final bid process letter. This process letter will outline the required topics for the LOI. Frequently these points will be similar to the IOI, but with more depth and detail required.

LOI Specifics

• Final Deal Terms — The LOI should provide a final summary of all proposed deal terms that will later guide the purchase agreement. As part of a final bid package (when LOIs are due), buyers may occasionally be required to submit an initial mark-up to a draft purchase agreement.
• Final Purchase Price — A final purchase price is now required, rather than a range. Buyers are also able to update their bid based on diligence findings, so the final LOI purchase price may not even be within the range laid out in the IOI.
• Final Structure and Funding — The LOI should provide confirmation on transaction structure (stock vs. asset), as well as provide more detail around sources of funding. This may include letters of support from lenders delivered as attachments to the LOI, for example.
• Updated Timeline — A final timeline to close outlining any outstanding diligence items to be completed.
• Final Management Roles — By this point the buyer is expected to have finalized post-close plans for management.
• Exclusivity — Buyers may choose to insert exclusivity language at this stage, typically a period of 30 – 60 days in order to wrap up any final items prior to transaction close. In well-banked, competitive processes sellers are unlikely to agree to this, but it is quite common in less-competitive lower middle market transactions. If agreed upon, this is one portion of the LOI that may be binding in nature.
• Closing Conditions — A list of any required tasks, approvals, or consents that must be completed prior to close.
• Break-Up Fee — More common in larger transactions, this is a legally binding fee that must be paid if the transaction is cancelled.
• Additional Items — Some items appear occasionally on a case by case basis, including language on management employment agreements, commitment to acquire representations and warranties insurance, and retention bonuses and transaction bonuses.

Note that LOIs can be iterative, particularly in competitive processes. The seller and their advisors will likely negotiate on certain points prior to signing their preferred LOI. This is another instance in a competitive process where buyers may be pressured to increase price or provide more favorable terms as they compete against one another.

IOI vs. LOI Key Differences

For easy comparison, here’s a list of the key differences between an IOI vs. LOI.

• Finality — As discussed, the LOI is expected to be significantly more finalized across all points.
• Point Bid — LOIs will require a singular point bid for the purchase price, rather than a range.
• Legally Binding — LOIs may have components of the agreement that are legally binding, such as exclusivity and break fees, while IOIs are not legally binding documents.
• Exclusivity — Sellers will not agree to exclusivity at the IOI phase (unless someone pre-empts the auction), but exclusivity may be a serious topic for discussion at the LOI phase.

IOI vs. LOI: Additional Items for Consideration

It’s important to note that it’s not necessary to receive and IOI prior to an LOI, particularly for smaller transactions or a proprietary deal.

There are also instances in competitive processes where an LOI doesn’t follow an IOI. Occasionally bankers will require a “check-in bid” between the two stages, which is something of a hybrid between and IOI and LOI.

IOI vs. LOI: Next Steps

Now that you know the difference between an IOI vs. LOI, what comes next?

The third and final key document in an M&A process is the purchase agreement. This will be drafted and negotiated between the two parties following the LOI stage. Terms generally mirror what is included in the LOI (any significant deviation at this stage can cause ill will).

Once the purchase agreement is complete, the deal is considered ‘signed’. In a simultaneous sign and close, the deal will also close. Otherwise, there will be a period following signing prior to close where any other pre-close items are wrapped up, such as the Hart-Scott-Rodino (HSR) anti-trust process or other regulatory approvals.