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Indication of Interest vs. a Letter of Intent

January 19, 2023

While many economists are predicting that the United States economy will experience a recession during 2023, resulting in a decline in M&A activity, there are many M&A experts who believe M&A activity will experience a rebound over the course of the year. Buyers and sellers in M&A transactions will, as part of the sale process, enter into numerous documents and agreements. Indications of Interest (IOI) and Letters of Intent (LOI) are examples of two such documents and there is frequently confusion as to their meaning and how and when they are used.

An IOI represents an indication by the buyer to the seller of the buyer’s interest in the target. The fundamental purpose of the IOI is to show the seller the range of valuation that the buyer is potentially willing to pay and to reflect the serious intent of the buyer to pursue the opportunity. Generally, an IOI is asked for early in the process, after buyers have made a preliminary review of the Confidential Information Memorandum (CIM), in order to help narrow the list of serious potential buyers and to move the sale process closer to actual offers. While an IOI usually takes the form of a benign letter, they should be drafted by legal counsel for the buyer, in order to ensure that they do not represent a binding commitment.  In addition to a valuation range, an IOI will often contain the potential buyer’s thoughts regarding timing of the proposed transaction, transaction structure, transaction synergies and any other items that will help the seller to decide if the potential buyer represents a good fit and is worth pursuing further, through the negotiation of an LOI or moving directly to the negotiation of a definitive purchase agreement.

On the other hand, an LOI is a document submitted by the buyer to the seller after the buyer has conducted some preliminary due diligence on the target and engaged in preliminary conversations with the seller regarding the proposed transaction. LOI’s, are usually signed by the seller and buyer, and are used as a guide for further negotiations towards a final definitive agreement and the closing of the transaction.  LOI’s can help to move the process forward because they allow both parties to frame many of the material terms of the transaction, such as price and fundamental deal structure early in the process so that neither side wastes time pursuing an opportunity where the value and terms would be unacceptable to the other side. LOI’s typically summarize the primary points of the proposed deal, including a price or price range, potential price adjustments, deal structure, timing, scope and extent of indemnity and key conditions or agreements that will be required. It is common for an LOI to contain several binding provisions, such as access of the buyer to the target to conduct further diligence, exclusivity, breakup fees or penalties and confidentiality. However, LOI’s are usually not intended to be a binding offer to consummate a transaction, and for that reason, it is important that counsel is involved in the drafting of the LOI to ensure that it doesn’t result in a binding agreement.