As a business owner, the sale of your company can be a complex and emotional process.

You might have questions about differences between two key documents in the transaction process: IOI vs. LOI.

In this post, I’ll unpack the distinctions between an IOI and an LOI, along with answers to six frequently asked questions about these documents and deal process.

Indication Of Interest VS. Letter of Intent (IOI VS. LOI)

In the process of selling a business, the Indication of Interest (IOI) and Letter of Intent (LOI) are two important documents that are used to signal a potential buyer’s interest in acquiring the company.

These documents are a critical step in the negotiation process between the buyer and the seller and play a vital role in defining the terms of the transaction.

Indication Of Interest (IOI)

An IOI is a non-binding expression of interest from a prospective buyer. It’s typically a short document that outlines the buyer’s interest in acquiring your business and the general terms they have in mind.

An IOI is usually the first step in the sales process and can help you gauge the level of interest from multiple buyers.

Receiving an IOI can be an excellent sign that a potential buyer is interested in acquiring your company, but it also means that there is still much work to be done in order to reach a definitive agreement. 

Letter Of Intent (LOI)

A LOI, on the other hand, is a more formal document that outlines the terms and conditions of a proposed transaction. Unlike an IOI, a LOI is legally binding, meaning that if both sides sign it, they are committed to moving forward with the sales process based on the terms outlined in the document.

It outlines the basic terms and conditions of the proposed acquisition, but it also signifies that the buyer is committed to the transaction structure and is willing to move forward with due diligence.

The LOI phase provides more certainty in the transaction, and often serious potential buyers will have already completed early diligence work. 

IOI Example

An IOI might include the following information:

·         The name of the buyer and a brief description of their company

·         The price and terms the buyer is proposing for the acquisition

·         Details around funding sources

·         A timeline for due diligence and closing

·         A statement that the IOI is non-binding and that the buyer is not committed to proceeding with the acquisition

As an example, let’s say Bob wants to purchase Jane’s tech company. Bob sends Jane an IOI outlining his desire to buy her company and also proposes initial terms such as price and payment structure if they agree upon a deal.

At this stage, neither Bob nor Jane are obligated to complete the deal; they are simply expressing their intent to negotiate further.

LOI Example

A LOI, in comparison, might include the following information:

·         The names of both parties and a description of the company being acquired

·         A detailed description of the terms, deal structure, and financing for the proposed transaction

·         A timeline for due diligence and closing

·         Closing conditions (list of required actions that must take place before the transaction can close)

·         Exclusivity clause (optional: the length of time the buyer has exclusive rights to negotiate with no other potential buyers)

·         Details around post-close roles for management team

·         A commitment from both sides to move forward with the sale based on the terms outlined in the LOI

Once negotiations have been completed and both Bob and Jane are in agreement about all relevant details regarding the sale – such as purchase price, payment terms, etc – they sign an LOI which locks in their agreement and binds them both legally.

At this point, either party can back out if certain conditions aren’t met (e.g., due diligence findings), but generally speaking both parties should be prepared for the transaction moving forward once an LOI has been signed by both sides.

Frequently Asked Questions

What are the key differences between an IOI and LOI?

·         Purpose: while IOIs are used purely as preliminary gauges of interest on behalf of potential buyers, LOIs are further along in the process and with more finalized deal points.

·         Point Bid: LOI requires a specific purchase price bid, not a range.

·         Legally Binding: LOI has legally binding components, like exclusivity and break fees, while IOIs are not.

·         Exclusivity: Sellers don’t agree to exclusivity during the IOI phase, but it’s a topic for discussion during the LOI phase.

·         Level of Detail: IOIs are broad with limited detail on prices and negotiation points, while LOIs are legally binding with more specific terms.

When Should An IOI Be Used?

An IOI is used when a potential buyer wants to express interest in a business or assets, but is not yet ready to commit to a formal agreement.

When Should An LOI Be Used?

An LOI is a sign of serious intent from a potential buyer, whether that’s a private equity firm or other buyer.

It should be used when the buyer and seller have agreed on key terms and conditions of a deal, and are ready to move forward with the formal process of due diligence and closing.

What Happens If I Receive An IOI But Don’t Sign It?

You are not obligated to do anything with it – you can simply discard it or use it as leverage for further negotiation with the potential buyer if desired by replying with your own counter offer or adjusting some details within their proposed IOI in order to reach a mutually beneficial compromise on pricing or timeline expectations..

Can I back Out After Signing An LOI?  

Yes – although each situation will vary depending on what was agreed upon within the contract itself prior to signing, generally speaking there will be conditions outlined within the contract that must be met before either side can back out without penalty (such as due diligence findings not meeting expectations).

What Happens After An IOI As Received?

After receiving an IOI, you have the option to engage in further discussions with the buyer to negotiate the terms of the sale. If you reach an agreement, a LOI can be drawn up.

Is An IOI Legally Binding?

No, an IOI is a non binding document and does not create a legal obligation between the buyer and seller.

Is An LOI Legally Linding?

Yes, an LOI is legally binding agreement. If both parties sign it, they are committed to moving forward with the sale process and purchase agreement based on the terms outlined in the document.

Can An IOI Be Converted Into An LOI?

Yes, an IOI can be converted into the next phase of LOI if both parties agree on the terms and conditions of the sale.

What Happens If One Party Breaches The Terms Of The LOI?

If one party breaches the terms of the LOI, the other party may have the right to terminate the sale process or seek compensation for damages.

What Happens After An LOI Is Signed?

After an LOI is signed, the parties move forward with the due diligence process and negotiate the final draft purchase agreement, leading to the closing of the deal.

Next Steps

At this point, you should have a good understanding of what an IOI and LOI are and how they can be used in the sale of a business.

If you have been presented with an IOI or LOI, it’s to take the time to review all terms and conditions carefully before signing anything.

As always, I’d recommend consulting an attorney or M&A advisor to ensure that your interests are properly protected and secure the best outcome for your business.