Do people use IoI's? If so, how?

May 30, 2020

by an investor from Carnegie Mellon University - Tepper School of Business in Philadelphia, PA, USA

I'm a self funded searcher and I have read that Indications of Intent are an important component of progressing into serious talks with sellers, most notably from Jim Sharpe's posts and the HBR Guide to Buying a Small Business. But I've spoken with small business lawyers who have never heard of an IoI. Given such a drastic difference, I thought I'd ask the community for their thoughts on the benefits of using an IoI and their importance in progressing a deal.

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Reply by a searcher
from Harvard University in MG9V+6H2, Guatemala City, Guatemala

I do not come from an M&A background (pre-Search Fund), so take my following comment with a grain of salt: I typically use IOIs a lot as a searcher - although I feel that over time and with multiple conversations with people in the community, the distinction between IOIs and LOIs can sometimes be blurry, at least for me. I believe that they both lie in a spectrum of formality/seriousness with regards to the deal at hand - some IOIs can look like LOIs and viceversa, and they also evolve as the deal evaluation/negotiation process progresses.

"My" IOIs are like a boiler plate LOI, containing all the key items that will be of discussion and apply to pretty much any transaction (i.e. transaction price, structure, working capital peg requirement, real estate treatment, exclusivity period, general DD requirements and timeline, etc.), that I submit relatively early on (after receiving some general info about the company - financials, mgmt presentation, customer concentration and recurring revenue data, org chart, etc.) in the discussions with a company. From my view, it serves well as a good starting point of negotiations where all the big items that will be negotiated are brought into light and softly sets expectations for the seller. Additionally, it can quickly help you identify sellers that are truly committed to sell and have reasonable expectations, before you invest too much time analyzing the deal at hand. As conversations evolve, negotiation gets underway, and the process starts advancing, that IOI slowly gets more details added and it converts into an LOI that you formally submit at a stage were you have confirmed your interest in the company and are ready to commit to a DD.

To me, it's a great to tool to make the buying-decision-making-process more effective.

Reply by an member
from Columbia University in New York, NY, USA

The LOI / IOI distinction is really just corporate/legal jargon at the end of the day. For all intents and purposes, they are the same document. An LOI/IOI generally leads with a one-page memo outlining the reason for the acquisition, why the target is so special/great, why the acquirer is the best one, etc. etc. and is followed by 1-2 pages outlining the high-level transaction terms being contemplated (valuation, % acquired, consideration, etc.), the assumptions in reaching those terms (cash-free, debt free, etc.), and next steps (confirmatory legal, accounting, tax, reputational, etc. due diligence; negotiation of legally binding docs). In a formal auction process, bankers/brokers will require the acquirer to submit a non-binding LOI/IOI/term sheet to see if its offer is competitive enough to move it to the next stage of diligence. In a direct deal with target management, the acquirer may submit this document before or after conducting significant diligence, and prior to negotiation of legally binding agreements and confirmatory diligence with the target.

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