IOI vs LOI: What’s the Difference?
Are you a business owner contemplating selling your company? If so, you've likely heard terms thrown around like Indication of Interest (IOI) and Letter of Intent (LOI) during talks with potential buyers. Understanding the difference between these terms is important for navigating the sales process effectively. Watch our latest update to learn more:
What is an Indication of Interest (IOI)?
An IOI signals the initial step in the negotiation process when selling your business. It is a less formal offer made by a potential buyer, typically presenting a range of how they perceive your company's value. Unlike a Letter of Intent, an IOI may not involve requests for extensive financial information or require you to share detailed company information (due diligence). Instead, it serves as an informal expression of interest to begin further conversations around the potential sale of your business.
Key Points of an Indication of Interest:
Non-binding, less formal offer made by potential buyers.
Presents a range of perceived company value.
Typically does not require extensive financial information or due diligence.
Serves as an informal expression of interest to further discussions.
Understanding the Letter of Intent (LOI):
A Letter of Intent (LOI) represents a formal step in the sales process, contrasting with the less formal Indication of Interest (IOI). It outlines detailed terms of the proposed sale, including a precise valuation of the business and the methodology behind it. By executing an LOI, sellers typically agree to halt discussions with other interested parties, entering into an exclusive negotiation period with one buyer. This initiates the due diligence process, during which the buyer reviews internal company information in preparation for finalizing a purchase agreement, signaling progress towards a successful sale. While an LOI itself is usually not legally binding, it demonstrates a higher level of commitment from the buyer and increases the likelihood of reaching a formal agreement.
Key Points of a Letter of Intent:
Signifies a higher level of commitment from the buyer.
Contains a precise valuation of the business and details of the proposed sale.
Specifies the reasoning behind the proposed valuation.
Upon execution, this starts the exclusivity period and formal due diligence process before close.
Navigating the Sales Process:
Differentiating between an Indication of Interest (IOI) and a Letter of Intent (LOI) is essential for business owners considering selling their companies. While an IOI provides a preliminary indication of a potential buyer's interest, an LOI should be taken more seriously, as it outlines specific details of the proposed sale and signifies a higher level of commitment. By understanding these terms, founders can navigate the sales process more effectively and negotiate more favorable terms for the future sale of their businesses.
With the above in mind, we encourage you to explore our website for further insights on M&A transactions. Have questions or want more specific guidance? Talk to Kirk
