LOI vs IOI: What Is the Difference?

The short answer

An indication of interest (IOI) is a buyer's early, non-binding statement that it would like to acquire the business and at roughly what price. It is written on the information memorandum, before management meetings and before any diligence, and its purpose is to get the buyer into the next round. A letter of intent (LOI) comes later and says more: the price and how it will be paid, the conditions, the exclusivity the buyer wants and the timetable to a signed agreement. In UK practice the same document is usually called heads of terms; the content and the effect are the same.

The difference is one of stage and of commitment. An IOI is an expression of interest that costs the buyer little to withdraw. An LOI is the document under which the seller stops talking to other buyers and both sides start spending real money on lawyers and accountants. Neither is the contract, but the second is treated as a promise in a way the first is not.

The indication of interest

Where it sits

In a run sale process the adviser circulates a teaser, buyers sign a non-disclosure agreement and receive the information memorandum, and are asked to submit indications of interest by a date. The IOIs are what the adviser and the seller use to decide who goes into the second round: management presentations, a data room and, eventually, a request for final offers. An off-market approach has the same shape without the timetable — the buyer's first written expression of price is an IOI whatever it is called.

What it typically contains

• Who the buyer is and, for a fund or a sponsor, where the money comes from and whether it is committed
• A valuation range — a range rather than a number, because it is struck on the memorandum alone — and its basis: enterprise value, cash-free and debt-free, with a normal level of working capital
• An outline of how the price would be paid: cash at completion, any deferred or contingent element, any expectation that the seller rolls equity or stays on
• The key assumptions the range depends on: the adjusted EBITDA as presented, the recurring revenue, the largest customers
• What the buyer would need to see in the next round, and how long confirmatory diligence would take
• Approvals still required — investment committee, board, lender

The range is where most attention goes, and the basis is where most of the information is. A range quoted on enterprise value with a stated working-capital assumption can be compared with another buyer's; a bare number cannot. See how to calculate enterprise value for the bridge every IOI is silently making.

The letter of intent, or heads of terms

Where it sits

The LOI follows the second round. The buyer has met management, seen the data room at least in outline and refined its view of price, and the seller has chosen — or is choosing — a preferred party. It is the document that opens the diligence stage in the deal pipeline: once it is signed, the seller grants exclusivity, the buyer instructs advisers on the full request list, and the lawyers begin the share purchase agreement.

What it typically contains

• The price, now a number rather than a range, and its basis — cash-free, debt-free, with the working-capital target or the mechanism for setting it, and whether completion accounts or a locked box will be used
• The consideration lines: cash at completion, deferred consideration and its dates, any earn-out with its metric, threshold, cap and measurement period, any vendor loan note, any equity roll
• Conditions precedent: satisfactory diligence by workstream, funding, approvals, key-person retention, third-party consents, no material adverse change
• Exclusivity: the period during which the seller will not solicit or negotiate with anyone else, and what ends it
• The scope and period of diligence, and the timetable to signing and completion
• Outline positions on warranties, restrictive covenants and the seller's role after completion
• Confidentiality, costs, governing law, and a statement of which clauses are intended to bind

A well-drafted LOI reads like a summary of the agreement it precedes. That is the point: the more of the commercial terms that are settled here, the less is left to be argued about once both sides have spent on diligence and neither wants to walk away.

What is binding, and what is not

Both documents are ordinarily expressed to be non-binding on the deal itself — "subject to contract" — so that neither side is obliged to buy or sell until the agreement is signed. But an LOI usually contains clauses that both sides do intend to bind, and they are the ones that matter in the period before signing.

• Exclusivity. The seller's promise not to deal with anyone else for a period. It is the buyer's main protection for the money it is about to spend, and the seller's main concession.
• Confidentiality. Usually already covered by the NDA, restated so that the terms of the offer itself are covered too.
• Costs. Who bears whose costs if the deal does not proceed, and in what circumstances — for instance if the seller withdraws during exclusivity.
• Governing law and jurisdiction. Which law applies and which court decides a dispute about the binding clauses.

Whether a clause binds depends on how it is drafted and on the conduct of the parties, not on the heading of the document. A buyer should have the LOI reviewed by its lawyers before signing it, and should not assume that "non-binding" on the cover page settles the question for every clause inside. Nothing in this guide is legal advice.

How a seller's adviser uses IOIs

The adviser's job at the IOI stage is to choose a second round that is competitive and credible. That means ranking on more than the top of the range. A high range from a buyer with no evidence of funding, a vague basis and a long list of approvals is a weaker IOI than a lower range from one whose money is committed, whose assumptions are stated and whose conditions are few. Advisers also read an IOI for what it says about the buyer as a counterparty: how well it has read the memorandum, whether its questions are the right ones, whether it will be workable in diligence.

For the buyer this has a practical consequence. The IOI is a document about credibility as much as price. Stating the basis clearly, naming the assumptions, showing the funding and keeping the conditions to the ones that are real does more to get into the second round than adding to the top of the range.

How price, structure and conditions are expressed at each stage

Common mistakes buyers make

• Committing to a number diligence has not earned. An IOI range struck on the seller's adjusted EBITDA becomes, in the LOI, a number the seller treats as agreed. If diligence then reduces the EBITDA, the buyer is re-trading against an expectation it created. State the assumption the price depends on, in writing, at both stages.
• Vague conditions. "Subject to satisfactory due diligence" protects the buyer only as far as it would be read, and gives the seller no idea what would satisfy you. Name the workstreams and the specific matters the price depends on.
• Silence on basis. A price with no statement of cash-free, debt-free and normal working capital is a price that will be argued about later, and usually not in the buyer's favour.
• Funding stated but not evidenced. A seller's adviser will discount an IOI whose money is not shown, and will discount an LOI even more.
• Exclusivity set to a convention rather than to the work. Too short and the buyer runs out of time; too long and the seller resists, or extracts a price for it.
• Treating the LOI as a formality. It is the last document before both sides commit real cost, and the terms it leaves open are the ones that will be fought over when neither side can afford to walk.

How TrueValue generates offer documents

In TrueValue the offer documents — an offer letter for the indicative stage, a letter of intent and heads of terms — are generated from the deal record rather than from a blank template. The target and the price come from the deal, and the payment structure from the deal's primary economics scenario: the cash at completion, the deferred instalments and their dates, the earn-out with its targets and payment dates, each read from the structure the returns were modelled on, so the price in the letter cannot disagree with the model behind it. Conditions precedent, the exclusivity and diligence periods, restrictive covenants and the standard clauses are set on the document, and the buyers and sellers are named as parties. Once drafted, the document is sent for signature from the same place through an e-signature envelope with routing, identity checks and a certificate of completion, and the executed copy is filed back on the deal with the rest of the deal's documents.