IOI Questions - Including an Expiration date & when to mention Escrow

February 13, 2021

by a searcher in Tampa, FL, USA

At the risk of getting the cart ahead of the horse here on this knowing that an IOI is potentially just as important as the color scheme of your wedding invitations, wanted to get more guidance on including a time/date component to an IOI.

I am looking at an opportunity that is broker represented but it is not being run as a formal process (ex. listing on sites, adhering to a strict bid process timeline, etc.). However, I am aware that there are other interested parties (# unknown) and I get the sense that my IOI is going to be "shopped" around amongst the others at the table. At the risk of potentially coming off as a jerk, was curious to see if including a 3-5 business day expiration on my IOI submission would be prudent/advisable. What might be the reasons why I shouldn't do this? Or is the time expiration something that would be more appropriate for LOI?

Also, I would like to include an Escrow component to the deal and am curious on when this gets included in the written communications. Do you typically wait until the LOI stage or is IOI the place to mention? And is it typically based on a % of the consideration (ex. 5% of the acquisition price will be held in escrow for 18 months with half released at the 9-month mark and the remainder at the 18-month mark)?

Reply by a searcher
from Harvard University in Colorado Springs, CO, USA

I'll be the one to make the counter-argument for an expiration date. I don't personally see much upside to it. My typical tactic is to send in an asking price offer and then not follow up with the broker. This signals that I'm busy and have other things to work on much more so than an expiration date. Also, if you are familiar with the chapter on real estate agents in Freakonomics, you should consider reviewing it. Brokers are much like RE agents in that they theoretically represent the buyer, but their incentives are aligned more with the buyer -- they make more money in a year by completing 10% more deals at a 10% discount than by 10% fewer deals at a 10% premium. This suggests that everyone is correct on the conversation with the broker. Having the broker in your corner is the absolute best thing you can have. They can and will use information asymmetry to convince an owner to go with one deal over another or even that "this is the best offer you're going to get, so better act quickly". Feel free to DM me and I'll share a couple of IOIs that I sent if you think it would be helpful. Best of luck!!

Reply by an intermediary
from Wake Forest University in Winston-Salem, NC, USA

Agree with ^redacted‌, have a conversation. They may not be able to give you an explicit answer, but that will further their understanding of your seriousness. 3 days is probably not going to come off well. When I'm on the buyside, we usually do 5-7 days. As for the escrow, is this an asset or stock sale? A generic, blanket escrow of that size and length of escrow should be related to the potential for latent liabilities to come up and be the responsibility of the buyer (inclusive of occurrence-based and tail insurance). Perhaps at this stage, just include "an escrow to be determined based on further due diligence and understanding of the potential liabilities."

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