What Is an Indication of Interest in an M&A Deal?
The indication of interest (also known as the indication or IOI) is a key landmark in any M&A deal. This document provided by the Buyer suggests a valuation range that he is willing to pay for a company. Typically, a Seller receives indications from numerous Buyers. If the Buyer’s indication is acceptable, the next step is for her to attend a management meeting and submit a letter of intent.
Think of the indication as akin to a father asking his daughter’s date, “What are your intentions with my daughter, young man?” The indication provides an overview of Buyer’s intentions and sets the stage for what the final deal will (well, may) look like.
An indication may sound like a teaser, and in some ways it is. A teaser is compiled by a Seller (or a Seller’s intermediary); an indication of interest is created by the Buyer. Essentially, the indication is the Buyer’s teaser.
The teaser is document (often anonymous) that explains the basics of the company for sale: products, customers, revenues, profits. The indication isn’t anonymous; it’s a specific Buyer’s first volley, expressing the Buyer’s interest in a written and therefore somewhat formal medium.
As a rule, a Seller shouldn’t meet with a Buyer until he knows that Buyer’s intentions. An indication of interest is simply a quick way for the Buyer to say to the Seller, “We’re interested in doing a deal.”
The document goes on to say, “Based on the information you’ve provided us, we’re interested in buying your company and are willing to pay a price somewhere between X and Y.” The key component of the indication is the valuation range. But other considerations lurk in this short and quick document.
Even though the indication isn’t a binding offer and likely contains some legal-weasel words about it “not constituting an actual offer,” the mere existence of the indication helps elevate the offer to something more substantial than a simple discussion. Putting words on paper is a powerful thing.