Relationships in M&A often feel a bit like dating.
In the ballroom of the open market, investors and buyers court businesses they think will return a profit. You might send the same flirtatious advances when raising capital or selling your business. The first step in this courtship process is the indication of interest (IOI).
Just as you probably wouldn’t reveal your every intention on a first date, similar psychology happens over deals. People looking to buy a business or shares in one usually make their first move with a letter indicating interest to test the waters.
An indication of interest serves multiple purposes in the M&A process, and while informal, it’s important to understand it as a seller. We’ll discuss exactly what an indication of interest is while focusing on our specialty, the M&A market.
What’s an Indication of Interest?
An indication of interest or IOI is a formal, non-binding letter or document expressing interest in buying a company or a company’s securities (stock, assets, and so on).
You most often see IOIs in three situations:
- Before an acquisition
- Before an initial public offering (IPO)
- In the early trading of stock and other securities
Indications of Interest in Mergers and Acquisitions
In the world of M&A, you’ll receive IOIs from people interested in buying your company. Generally, buyers send these letters to see whether you’d consider a sale.
The core elements of an IOI in mergers and acquisitions are:
- An approximate price range. As either a dollar value range (for example $90 million to $100 million) or as a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA) (for example, four to five times EBITDA).
- The buyer’s availability of funds and their sources (are funds coming from investors or free cash from their own business?).
- A management retention plan (will the founding members/C-suite stay on after the sale?) and equity owner roles (investors and founders) post-transaction.
- The necessary due diligence items the buyer will want to see and a rough timeline.
- Proposed elements of the deal structure (all cash, cash plus founder earnouts, cash plus seller financing plus earnouts, etc).
- Timeframe to close the transaction.
One recent large acquisition that likely originated through an indication of interest was when design software corporation, Adobe purchased web design tool, Figma, in September 2022.
Although the deal closed in 2022, both companies discussed the acquisition as early as 2020. And while most negotiations happened through in-person meetings behind closed doors, there was probably a concrete IOI in the process with a valuation and general terms. You need to something on paper before a deal can be rejected (and Figma founder, Dylan Field, rejected two suggested deals).
Another, more public example of an indication of interest was Elon Musk’s announcement of a hostile takeover (taking a controlling share of a publicly-traded business) of Twitter in April 2022. Musk made a non-binding offer of $54.20 per share in cash, 38 percent above the price on the last trading day before he went public with his stake.
As this indication of interest was less about courtship and more about seizing the company by force, it notably lacked:
- Timeframe
- Sources of income
- Details of what would happen to management/investors after the deal. As we know now, Musk fired most of Twitter’s management shortly after the takeover.
Indications of Interest Before IPOs
Have you ever heard about a stock preparing for IPO and wished you could be the first to get it? If you make your brokerage send an IOI to the business, you could be one of those first recipients.
Before an IPO of a security (usually a stock like Apple AAPL), businesses, individuals, or other entities interested in buying the stock can request early access through an IOI (see the graphic below).
These IOI letters simply state:
- Who the entity is.
- The number of stocks they wish to purchase during the eventual IPO.
IOIs in the stock world are informal and accepted on a first-come, first-served basis. As demand for a stock may exceed supply, submitting an IOI does not guarantee a buyer will be able to buy stocks in an IPO.
Indications of Interest in Block Trades and Market Liquidity
IOIs are also used to help move large amounts of stock between buyers and sellers quickly.
When you buy or sell a stock on the stock market, you aren’t guaranteed a buyer or a seller to fulfill your order. Most orders on the US stock market are fulfilled relatively quickly because large organizations are selling or buying millions of dollars worth of stock at any given time. Often they are doing this preemptively with IOIs.
For example, a large investment organization like the Blackstone Group might decide to buy $5 billion worth of Apple shares. This would be considered a block trade, or a large, privately-negotiated stock transaction.
Blackstone wants to buy all these shares but might not want to do it all at once or from the same buyer. A massive, one-time stock buy could affect the natural forces of the stock market – encouraging massive buys or sells from smaller investors. Blackstone instead wants to get the word out to market makers, firms that buy and sell securities while profiting from the difference in the bid-ask spread to fulfill their orders.
Blackstone will send their IOI for the Apple shares directly to the stock market. This is a non-binding order, meaning they don’t have to follow through if they change their mind.
Once this information hits the market, a market maker like Citadel Securities sees the Blackstone IOI and decides whether or not to act. They know they can buy the corresponding Apple shares from brokers and likely turn them over to Blackstone for a small profit. This lets the stock market work much more quickly and efficiently for a large number of buyers (see the graphic below).
Indications of Interest vs Letters of Intent
IOIs are often confused with letters of intent (LOIs) as they share similar traits. Both are non-committal letters from buyers expressing an interest in buying your company. However, they are distinctly different steps in the M&A process.
The IOI is a much more informal proposal than an LOI. It’s used as a preliminary tool to entice you to later sign an LOI. While M&A deals almost always use an LOI, they may or may not get there via an IOI.
To illustrate what I mean, an IOI says:
“I’m a serious buyer interested in your business. I’d be willing to place an offer on your business on these general terms.”
While an LOI says:
“I’m a serious buyer interested in your business. I am willing to pay X and agree to Y terms provided due diligence goes well.”
On Acquire.com, for example, an LOI is baked into your workflow but many buyers won’t include an IOI. Most sellers have already named their terms and prices and don’t need to be wooed into a sale.
However, if a buyer covers everything an IOI would in chat (general price range, due diligence time, what happens to management), you could argue they’ve submitted an IOI in practice.
An Example of an M&A IOI
Below is a sample indication of interest posted by the SEC showing a business called Blackbaud, Inc.’s intent to purchase a business called Kintera. It’s a somewhat tedious legal document, but we’ve highlighted some key points to notice after the image.
Takeaways From This IOI
A quick readthrough will reveal that this IOI meets all of the normal standards for an M&A IOI. You may also notice:
- Similar to an LOI, this indication of interest includes confidentiality and exclusivity clauses that will go into effect if the seller signs the letter (section 8).
- In section 10, the buyer placed a termination date for the IOI. This is likely a subtle way to push the seller towards a faster decision.
- In section 5, Blackbaud neglects to mention exactly which items it would need to review for due diligence. They only state their estimate that the remainder would take about seven days (a bold and tantalizing estimate in larger transactions).
What You Need to Remember About M&A IOIs As a Seller
Here’s what we think you should remember about IOIs:
- Buyers tend to send IOIs to break the ice with a seller who hasn’t expressed interest in selling.
- IOIs are not always official legal documents. They can be any statement of interest that meets the requirements we mentioned earlier (although other forms may not hold up as well in court).
- IOIs are non-binding. A buyer can change the terms of an IOI at any time during negotiations or decide not to buy the business.
- IOIs can be extremely detailed or vague. It’s on you as a seller to determine if an IOI is tantalizing enough to move forward.
We hope we’ve clarified a lesser-known part of the M&A process for you. Check back on our blog periodically for more need-to-know M&A terms and startup growth tricks.
Happy building.
Is an Indication of Interest Binding?
Indications of interest are non-binding agreements, meaning you have no obligation to sell to the sender and the sender has no obligation to buy. Buyers frequently add things like expiration dates to their IOIs after which their current offer is no longer valid (as shown above).
Some buyers might add binding terms that trigger if a seller signs an IOI (like confidentiality and exclusivity).
Who Writes an Indication of Interest?
Buyers interested in buying a company or shares in a company typically write IOIs. For large transactions, IOIs are usually drafted by a legal team hired by the buyer as they are part of the paper trail that can be used in court should any problems arise in the transaction.
In What Stage of the Buying Process Is the Indication of Interest?
An indication of interest is usually considered a preliminary document specifically sent to sellers to gauge their interest before any further steps or meetings.
Many mid-market deals occur without an official IOI. On Acquire.com, most deals occur without an IOI as sellers have already declared an interest to sell along with their desired price range and deal structure.
Can I Purchase a Business Without an Indication of Interest?
Indications of interest are not a requirement in the M&A process. However, if you want to impress a seller, specifically a large one with lots of competition, an IOI can show that you mean business. They are extremely common when dealing with big acquisitions.
Do I Need an Indication of Interest on Acquire.com?
No. On Acquire.com all of our sellers are already interested in selling and most have already stated price ranges on their posting. However, you can still send one if you’d like. Most sellers are open to negotiation.
The content on this site is not intended to provide legal, financial or M&A advice. It is for information purposes only, and any links provided are for your convenience. Please seek the services of an M&A professional before any M&A transaction. It is not Acquire’s intention to solicit or interfere with any established relationship you may have with any M&A professional.
