IOI vs LOI: Comparing an Indication of Interest and Letter of Intent

In the world of business transactions, IOIs and LOIs are two acronyms that are often used interchangeably and can appear confusing to a first-time buyer. Each serves different purposes and has different implications for the parties involved. 

An IOI, or indication of interest, is a preliminary document that expresses a potential buyer's interest in acquiring a target company. 

An LOI, or letter of intent, on the other hand, is a more formal document that outlines the basic terms and conditions of a proposed transaction. In small business acquisitions, this is often referred to as an “offer.”

 In this blog post, we’ll drill down into what each document means and how they are different.

What is an Indication of Interest?

An IOI stands for an Indication of Interest. IOIs are typically used for much larger deals, where the buyer wants to indicate his or her interest in buying the business during a competitive process.

The purpose of an IOI is to have a gut check on whether the buyer and seller are a good fit for one another, before the buyer digs deeper into diligence and invests legal resources into formalizing a more thorough and, sometimes, binding Letter of Intent.

One thing that distinguishes an IOI from an LOI is typically the lack of a signature block for the other party. An IOI cannot be “countersigned.” Instead, the buyer is often asking the seller if it makes sense to proceed with the broad price and next steps outlined in the document. Sometimes, you’ll even see “for discussion purposes only” across the header or footer of the Indication of Interest.

What is a Letter of Intent?

An LOI, or letter of intent, is a more formal document than an IOI, and is used to outline the basic terms and conditions of a proposed transaction. For main street business acquisitions, normally the LOI is the first document handed formally to the selling business owner. It serves as a way to formalize the buyer’s offer to acquire the company.

Included in the Letter of Intent will be much more granular terms than in the Indication of Interest:

• Purchase price, and a way for adjusting the purchase price

• Due diligence plan, including financial, legal, and operational due diligence

• Closing conditions, including securing bank financing and equity raise

• Exclusivity, such as whether the buyer has the exclusive right to buy the business for a period of time

• Term, outlining how long the offer is valid for and the exclusivity is granted

• Assets included, which may include carveouts for assets that the selling owner wants to keep

• High-level transition details, such as the term of the transition period and any consulting period thereafter

• Escrow, or any earnest money commitment to the deal

• Target close date, subject to change based on diligence and financing timelines

Key Differences between IOI and LOI

Whether or not to use an Indication of Interest is up to a buyer and depends on the deal. We recommend using an IOI if you plan to use counsel to draft an LOI and it will be relatively bespoke. An IOI is a good way to get a rough sketch on paper for more detailed discussions with a seller.

Regardless, a LOI is a critical piece of the puzzle for buyers. It is normally unwise to jump straight into trading drafts of a Purchase Agreement. Submitting a Letter of Intent allows you to align on the outlines of a deal with the seller and buy yourself time to diligence the opportunity.

 When drafting a Letter of Intent, we recommend reflecting on how you plan to use the document. Some buyers prefer to get as detailed as possible to avoid any misunderstandings down the road, while others prefer to keep it high level and use it to quickly gain exclusivity over a hot and interesting deal.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.