In a business sale process, a merger and acquisition advisor (M&A advisor) will request an Indication of Interest (IOI) from potential buyers after they’ve had an opportunity to review a Confidential Information Memorandum (CIM). In the world of mergers and acquisitions, an Indication of Interest (IOI) is a way for potential buyers to tell the seller what type of offer they are contemplating. The IOI, along with other information gathered about the buyer, will determine if the buyer will be invited to continue participating in the sale process.
The business auction process is designed to create competition among buyers, drive the sale price up and allow the selling business owner to choose from among several buyers. For a description of the whole business auction process, please see this article.
The IOI is not binding and it might be as simple as an email or it might be a formal, signed document. At a minimum, it should describe:
1) The value or value range that the buyer will offer for the company. This might be expressed as a number or as a valuation methodology. For example, the buyer might state that they value the company at 6 to 7 times adjusted EBITDA.
2) The proposed structure of the offer including:
Will it be a stock sale or an asset sale?
Will it be cash-free and debt-free, meaning that the seller keeps the company’s cash and the seller pays off all debts at closing?
How much cash will be paid at closing. This may be expressed as a set number or as a percentage of the final purchase price (e.g. 80% of the purchase price paid in cash at closing).
Any proposed seller financing and the basic terms of that financing. For example, the buyer may request that the seller hold a note for 10% of the purchase price for 5 years at an interest rate of 7%.
The terms of a proposed earnout. For example, the buyer may propose that 10% of the purchase price be paid at the end of year 1 if the company achieves its projected profitability for the year.
How working capital will be handled. For example, in an asset sale, it’s common for the buyer to include an average amount of working capital to be included in the purchase price.
3) Any financing contingencies that the buyer proposes. For example, if the buyer doesn’t have committed capital (i.e. funds in the bank), their offer may be contingent on them raising the debt and/or equity needed during the due diligence period to pay for the company.
A more detailed IOI may also describe the buyer’s plans for managing the company and their intentions for the owner and the management team (e.g. employment contracts) and even their plans for the company itself. For example, will the company remain an independent operating entity or does the buyer plan to merge the operations into another company?
In a competitive auction process, it’s not unusual to receive 20 or more IOIs from potential buyers. About one quarter of the IOIs are usually deemed to be competitive and about one quarter are often shockingly lowball offers. The rest will be somewhere in between. For example, in one Venture 7 Advisors sale process, we represented a business valued at $18 - $20 million. We received 23 IOIs. Five of the IOIs proposed a value above $18 million and six of the IOIs suggested a value below $13 million. The rest were in between $13 and $18 million. The five IOIs above $18 million and two of the mid-range IOI providers were invited to continue in the sale process. The rest were rejected.
To repeat: IOIs are not binding and not every buyer who submits a successful IOI will go on to submit a Letter of Intent. This is why it’s important to have a pool of potential buyers move forward in the sale process. For example, of the seven potential buyers who moved forward in the example above, only four ultimately submitted a Letter of Intent.
Sample Indication of Interest Document:
The early phases of the business sale process are about building broad interest in the company. The Indication of Interest is the first opportunity for potential buyers to quantify their level of their interest. This phase clearly identifies which potential buyers warrant continued engagement, and which don’t have the intent or ability to pay a competitive price for the company.
The rest of the business sale process is about deepening the potential buyers’ understanding of the business and creating the conditions that will encourage each of them to submit their strongest offer, embodied in a Letter of Intent. In the steps that follow, the seller will get to know the potential buyers and determine which one offers the best combination of personal and cultural fit and financial consideration.
To understand how the collection of IOI’s fits into the broader business sale process, please see our description of the entire business sale process here.
About Venture 7 Advisors:
Venture 7 Advisors is a team of merger and acquisition advisors who assist the owners of small and mid-sized companies to plan and complete the sale of their business. We find the best buyer to meet each business owner’s financial and legacy goals. We represent clients in consumer products, distribution, manufacturing, B2B services, construction, telecommunications, and eCommerce from offices in Burlington, Vermont, the Hudson Valley, New York, and Western Massachusetts.
We're here to talk about your situation, provide information, discuss your options, and put things in perspective. Contact us at any time:
Bryan Ducharme
Managing Partner
Mobile: 802 578 6462
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