LOI vs IOI: Understanding the Difference

In M&A transactions, Letters of Intent (LOIs) and Indications of Interest (IOIs) are both used to express a buyer's interest in acquiring a business. While they may seem similar, they serve different purposes and come at different stages of the deal process.

What Is an Indication of Interest (IOI)?

An Indication of Interest is a preliminary, non-binding expression of interest from a potential buyer. It's typically the first formal communication after initial discussions and comes before detailed due diligence.

IOIs are usually brief—often just 1-2 pages—and provide a general sense of the buyer's interest level and preliminary valuation thinking. They help sellers gauge interest and narrow the field of potential buyers before investing time in detailed discussions.

What an IOI Typically Includes:

• Valuation range (often expressed as a multiple of EBITDA or revenue)
• General deal structure (cash, stock, debt financing)
• Brief description of the buyer and their interest in the target
• High-level due diligence requirements
• General timeline expectations

What Is a Letter of Intent (LOI)?

A Letter of Intent is a more detailed document that outlines the key terms of a proposed transaction. LOIs come later in the process, typically after the buyer has conducted initial due diligence and is ready to move toward exclusivity.

While most LOI provisions are non-binding, certain terms (typically confidentiality and exclusivity) are binding. The LOI sets expectations for the definitive agreement and creates momentum toward closing.

What an LOI Typically Includes:

• Specific purchase price (or formula for determining it)
• Detailed deal structure (asset vs. stock, cash vs. earnout)
• Working capital provisions
• Earnout terms if applicable
• Exclusivity period
• Due diligence scope and timeline
• Key conditions to closing
• Expected representations and warranties
• Confidentiality provisions

Key Differences at a Glance

When Each Is Used

Competitive Auction Process

In a competitive process with multiple buyers, sellers typically request IOIs first to gauge interest and narrow the field. Selected buyers are then invited to conduct further diligence and submit formal LOIs. This staged approach helps sellers manage the process efficiently.

Negotiated Transaction

In a negotiated deal with a single buyer, the parties may skip the IOI stage entirely and move directly to LOI discussions. The LOI then serves as the primary document establishing deal terms before definitive documentation.

Practical Tips

For Sellers:

• Use IOIs to filter buyers before investing time in detailed discussions
• Compare IOI terms carefully—valuation ranges can vary significantly
• Don't grant exclusivity until you're confident in the buyer
• Negotiate LOI terms carefully—they set the framework for definitive agreements

For Buyers:

• IOIs should express genuine interest and realistic valuation thinking
• Stand out by clearly articulating why you're a good buyer for this business
• LOIs should be thorough but leave room for diligence findings
• Don't over-commit on terms you may need to adjust after due diligence

Conclusion

Both IOIs and LOIs play important roles in M&A transactions. IOIs help gauge interest and narrow the buyer field early in the process, while LOIs establish specific deal terms and create momentum toward closing.

Understanding when each is appropriate and what to expect from each document helps both buyers and sellers navigate the deal process more effectively. Whether you're comparing multiple offers or negotiating with a single buyer, these documents are key milestones on the path to closing.