What to Expect From the IOI and LOI Stages

We’ve previously shared the general process for selling your company. Two important milestones in this process are the Indication of Interest (IOI) and Letter of Intent (LOI). While these are always steps in a formal, investment bank-led process, you may also receive these documents in an informal process from potential buyers. Below, we’re sharing what you should be looking for in each document, as well as important considerations for you and your business at the time each of these are presented.

Indication of Interest (IOI)


The purpose of an IOI is not necessarily to choose one buyer or investor. Instead, the IOI stage is meant to provide enough details for business owners to narrow the pool of potential buyers to a manageable size for the remaining transaction. It would be extremely complicated and time-consuming to proceed into the due diligence phase with, say, 15 potential buyers, having to field data requests and questions from each. Instead, most business owners will narrow down the list of potential buyers to around five parties, using the IOI as the primary tool to evaluate each option.

An IOI may be less common in an informal process, or one where you are only in talks with one potential buyer or investor. In this case, the buyer may present an initial, looser LOI earlier in the process, or outline terms with you in a less structured way. The potential terms and considerations for you will still apply early in this type of transaction, and may help spark important discussions between you and the buyer.

Potential Terms

Indicative value will always be included at this stage, though it is typically expressed as a range. If it is a wide range, it’s wise to pay closer attention to the lower end of the range to ensure this meets your goal. Most transactions assume a cash-free, debt-free basis, meaning that the purchase price assumes any remaining cash in the company is swept to the seller once any debt is paid off.

Also typically included at this stage is the source of funding for each buyer. This is important for business owners to understand, as buyers who will be using outside funding (e.g., a lender for debt, a capital provider, etc.) may need additional time or approvals to actually close. If the buyer is proposing to use debt to fund a portion of the transaction, this is the time you’re able to begin to evaluate that amount and whether it is sustainable for your company going forward.

The last major point to hone in on at this stage is the “people plan”, or what the buyer’s plans are for your management team and employees. Whether this is expressed in a formal IOI or detailed in discussions between you and the buyer, now is the time to understand the buyers’ intent for your people and ensure they align with your goals and values.

For further terms that may be included at this stage, we’ve provided an example process letter that includes a list of terms that may be requested in an IOI. NOTE: a process letter is provided to potential buyers by an investment bank on behalf of the seller and outlines the next steps to proceed in the transaction. Different process letters can be sent to buyers at the IOI stage, during due diligence, and at the LOI stage.

Considerations for Sellers at the IOI Stage

While there will be several terms to read through and understand from each buyer, we think there are three areas for business owners to really focus on at this stage that can help inform which buyers you choose to advance in the process:

  • Valuation: valuation has to be a top factor in this decision. If a buyer isn’t at least in the ballpark of other offers, they’re unlikely to move up significantly at a later stage.
  • Type of buyer: at this stage you’re able to get a feel for the type of buyer each option will be. Are they viewing your company as an add-on acquisition or a platform investment? Will you be folded into a larger corporation? Does the buyer or investor have direct experience in your industry? Through the IOI and potentially discussions with the buyer (which may go through an investment banker at this stage), you’ll likely understand the answers to these questions or others that are important to you. This stage is a good time to exit from the process those that don’t align with your vision or requirements.
  • Buyer credibility or interest level: some buyers view the IOI stage (and even the LOI) stage as a numbers game, turning around a templated IOI within days of receiving information on your company, but without putting much effort into really understanding the company, the fit, and your goals. Pay attention to the effort and level of detail given in each IOI to see which buyers seem to understand your pain points or company history, and who show a genuine interest in you and your company.

Letter of Intent (LOI)


Now that you’ve selected a limited number of buyers from the IOI stage to perform further due diligence, the purpose of the LOI stage is to choose your final buyer and enter into exclusivity with them. At this point in the process, you’ve had extensive discussions with each potential buyer and should understand their vision for your partnership as well as the personal fit. A good amount of due diligence has been completed so each buyer has a better understanding of your company and areas they want to dig into further.

These discussions and potential terms culminate in the Letter of Intent, which presents each buyer’s offer, including more concrete and specific terms. This letter should form the basis of the purchase agreement, so the LOI is typically a negotiated document. It’s important to capture the most important or potentially continuous terms for each side at this stage, finding win-win solutions now so that the remaining transaction proceeds smoothly.

Even if you are not running a formal process, at some point you’ll receive an LOI from the buyer you are in talks with. Even if the discussions or due diligence is not as advanced as in a formal process by the time you receive the LOI, it’s important to make sure enough terms are included and agreed upon here so that you can ensure there is good alignment between you and the buyer before further time and money is spent on either side.

Potential Terms

Generally, an LOI will contain similar terms as an IOI, only with greater and more precise detail for each term. For example, rather than a valuation range, LOIs will include the proposed purchase price. For buyers using any kind of outside financing, most LOIs include details about where the financing has been secured from (including any documentation or commitments from these sources). Plans for your management team and employees should be fully fleshed out here and should be consistent with the discussions you’ve had with the buyer. For example, this section often includes plans for any incentive equity available to current or future employees, including details such as eligibility and vesting periods.

There may be other terms or conditions in the LOI that are material to the transaction actually crossing the finish line, or that substantially impact your proceeds. One example could be setting the mechanism by which the net working capital target for closing is set; in many cases this target must be met at closing for the transaction to finalize. Another relates to reps and warranties insurance – or lack thereof – and who is paying for this. We’ve previously shared five of these key terms we think sellers should look for in an LOI that can help avoid sticking points later in the transaction.

For further terms that may be included at this stage, we’ve provided an example process letter that includes a list of terms that may be requested in an LOI.

Considerations for Sellers at the LOI Stage

Now that you understand the plans and terms from each buyer in greater detail, you have enough information to choose between the remaining potential buyers. We think the below four areas are the most important for sellers to dissect and dig into to help make this decision:

  • Valuation: now that you have a final number from each buyer, you can weigh each purchase price against the other terms and benefits from each buyer. If the offers are close in price, you may find that other priorities – such as the structure of the deal or the cultural fit between you and the buyer – may affect your decision. Some of these, such as the structure of the deal, can materially affect your after-tax proceeds (which are not always equal to the purchase price). One LOI may require you to roll equity, one might have an escrow period, or one could include an earnout. We dig further into this topic in this blog. While the headline purchase price is important, it’s important to understand all nuances of this number before making your decision.
  • Timing: most LOIs include a plan and timeline for the remaining transaction, including remaining areas of due diligence. Two buyers may be offering the same purchase price, but one might say “we know your industry well and can complete any remaining due diligence in 30 days”, while the other may say “we need 120 days and will need to engage a few third-party diligence providers to complete due diligence”. Timing could also relate to any outside financing needed by a buyer, or any additional approvals needed for them to close the transaction. The LOI should indicate the level of certainty behind any outside financing (such as commitments from potential lenders), along with details of any additional approvals (internal or regulatory) needed for each buyer. While the timeline to close may or may not be a priority for you, some of these factors can also help you determine the certainty of closing with a buyer, which may impact your decision.
  • Legal: there will be various legal terms in the LOI that you should carefully review with your attorney, but we think one of the most important relates to reps and warranties insurance. This is an insurance policy that protects the seller against post-closing indemnity claims made by the buyer (typically in connection with a breach of a representation by the seller). In the event of a breach, the buyer will seek reimbursement for damages from the insurance carrier rather than from the seller. It’s important to understand from each buyer whether there will be insurance purchased, who will pay for the coverage, and what is covered. Typically, a transaction with this insurance policy will result in significantly less proceeds held back in escrow, which translates to greater cash at closing for the seller.
  • People: like the IOI stage, the LOI stage is a chance for you to review each buyer’s plans for your employees going forward and ensure they align with your vision and values. At this stage, those plans should be provided in greater detail. This can include compensation and contract terms for key employees, benefits plans, and details on incentive equity pools. Whether or not you plan to remain in the company post-closing, you should be able to anticipate the treatment of your employees by each buyer at this stage and factor that into your final decision.