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IOI vs. LOI—My Oh My!

by | Jun 18, 2024 | Business Law

In the complex and multifaceted process of selling a business, the initial deal-specific document a buyer may present to a seller is typically an Indication of Interest (IOI) or a Letter of Intent (LOI). Understanding the differences between these two documents is crucial for sellers to navigate the transaction process effectively and protect their interests. Generally, a buyer will provide an IOI or an LOI following a non-disclosure or confidentiality agreement being executed and some initial due diligence on seller and its business. The LOI is often used when negotiations of the final sale document will take a substantial period of time or when the parties desire to do an initial investigation of whether the sale or purchase of the business being sold is worth pursuing. On the other hand, the IOI is a more tentative document, often seen as an indefinite expression of a buyer’s interest in negotiating a purchase agreement in the future. This post will delve into the distinctions between IOIs and LOIs, their respective purposes, contents, and the strategic considerations a seller must be aware of when dealing with each.

Indication of Interest (IOI)

An IOI is a preliminary document submitted by a potential buyer expressing a non-binding interest in acquiring a business. It serves as an initial step in the transaction process, allowing buyers to outline their interest and provide a high-level overview of the terms under which they may be willing to proceed.

Key Components of an IOI

  1. Purchase Price Range: The IOI typically includes a proposed price range for the acquisition. This range is often broad and subject to further due diligence.
  2. Transaction Structure: Details on whether the deal will be a stock (for a corporation) or membership interest (for a limited liability company) purchase, asset purchase, or merger.
  3. Financing Sources: General information on how the buyer intends to finance the acquisition (e.g., cash, debt, equity).
  4. Due Diligence Requirements: Preliminary outline of the due diligence process and specific information the buyer will need.
  5. Timing: Estimated timeline for completing due diligence and closing the transaction.
  6. Conditions and Assumptions: These are assumptions about the business that the buyer is relying on, which may impact the final offer.
  7. Non-Binding Nature: A clear statement that the IOI is non-binding and subject to further negotiation and due diligence.

Strategic Considerations for Sellers

  • Assessing Seriousness: Sellers should evaluate the buyer’s seriousness and credibility based on the details provided in the IOI.
  • Confidentiality: Ensure that the IOI includes confidentiality provisions to protect sensitive business information.
  • Multiple IOIs: Receiving multiple IOIs can create competitive tension, potentially leading to better terms and a higher purchase price.
  • Flexibility: The non-binding nature of an IOI allows sellers to maintain flexibility and continue discussions with multiple parties.

Letter of Intent (LOI)

An LOI is a more detailed and formal document that outlines the terms and conditions under which a buyer intends to acquire a business. Unlike an IOI, an LOI is often partially binding, particularly in terms of exclusivity and confidentiality, and serves as a precursor to a definitive purchase/transaction document. Furthermore, sellers should be aware that the terms of an LOI may control the extent of a party’s obligation to negotiate in good faith.

Key Components of an LOI

  1. Purchase Price and Terms: A specific purchase price or a detailed pricing formula, along with payment terms (e.g., cash at closing, earn-outs).
  2. Transaction Structure: Definitive details on whether the deal will be an equity purchase, asset purchase, or merger, including any specific terms related to liabilities and assets.
  3. Due Diligence Process: Detailed plan and timeline for the buyer’s due diligence, including access to financial records, contracts, and other critical documents.
  4. Exclusivity Clause: Often includes a period during which the seller agrees not to negotiate with other potential buyers.
  5. Confidentiality Agreement: Binding clauses to ensure that all information shared remains confidential.
  6. Conditions Precedent: Specific conditions that must be met before the transaction can be completed, such as financing, regulatory approvals, and satisfactory due diligence.
  7. Termination Clauses: Conditions under which either party can terminate the LOI.
  8. Binding Provisions: Identification of which parts of the LOI are binding (e.g., exclusivity, confidentiality) and which are non-binding.

Strategic Considerations for Sellers

  • Negotiation Leverage: The LOI provides a framework for negotiating the final terms of the sale. Sellers should leverage this stage to address critical issues and seek favorable terms.
  • Exclusivity Risks: While exclusivity can lead to a committed buyer, it also risks sidelining other potential buyers. Sellers should carefully consider the length and terms of any exclusivity or “no-shop” clause.
  • Detailed Due Diligence: Sellers need to be prepared for extensive due diligence and ensure they have accurate and comprehensive information ready.
  • Legal and Financial Advisors: Engaging experienced legal and financial advisors is crucial to navigating the complexities of the LOI and ensuring the seller’s interests are protected.
  • Binding Clauses: Sellers must clearly understand and agree to the binding provisions in the LOI, particularly regarding confidentiality and exclusivity.

Key Differences Between IOI and LOI

  1. Binding Nature:
    • IOI: Generally non-binding, serving as an initial expression of interest without legal obligations.
    • LOI: Can contain both binding and non-binding elements, with binding clauses often related to confidentiality and exclusivity.
  2. Level of Detail:
    • IOI: High-level overview with broad terms and general assumptions.
    • LOI: Detailed and specific, outlining precise terms and conditions of the proposed transaction.
  3. Stage in Transaction Process:
    • IOI: Early stage, often used to shortlist potential buyers before detailed negotiations.
    • LOI: Later stage, following initial negotiations and preceding the drafting of a definitive purchase agreement.
  4. Due Diligence:
    • IOI: Due diligence requirements are outlined but not exhaustive.
    • LOI: More comprehensive due diligence plan and requirements.
  5. Commitment Level:
    • IOI: Low commitment, allowing both parties to explore other options.
    • LOI: Higher commitment, with specific terms that guide the transaction towards a final agreement.

Issues Sellers Should Be Aware of

When receiving an IOI or LOI, sellers must assess the credibility and seriousness of the buyer. This may involve the seller conducting some of its own due diligence on the potential buyer, such as reviewing the buyer’s financial capacity, industry reputation, and previous acquisition history. If a seller intends to work for the buyer post-closing, accept rollover equity in the buyer’s entity as part of the purchase price, or if any of the purchase price will be deferred, such as with an earnout, the seller should also consider the buyer’s strategic fit and long-term intentions for the business.

Valuation is a critical aspect of both the IOI and LOI. Sellers should ensure that the proposed purchase price reflects the true value of the business. If a potential sale is on the horizon, engaging valuation experts before the business is put on the market can provide an objective assessment and strengthen the seller’s negotiating position.

Exclusivity clauses in LOIs can be advantageous in securing a committed buyer but also pose risks. Sellers should negotiate the duration and conditions of exclusivity to avoid prolonged periods without engaging other potential buyers. It’s essential to include clear termination provisions if the buyer fails to meet certain milestones.

Protecting sensitive business information is paramount. Suppose a confidentiality agreement is not already in place. In that case, sellers must ensure that both IOIs and LOIs include robust confidentiality and non-disclosure agreements to prevent unauthorized disclosure or misuse of information. Sellers should also be prepared for the extensive due diligence process that typically follows an LOI. This requires organizing financial statements, legal documents, contracts, and other critical information. Transparent and accurate documentation can expedite the due diligence process and build buyer confidence. Even if a sale is several years away and before any potential buyers have been identified, getting these documents in order can help save a lot of time scrambling to collect them and lessen the probability of something being missed or forgotten.

Engaging experienced legal and financial advisors is crucial throughout the transaction process. Prior to a transaction, they can advise and assist in gathering and organizing the documents, information, and other materials buyers will typically request. They may also be able to help identify and explain issues and concerns a buyer may have about the business. The more sell-side diligence that can be done beforehand can pay dividends during the often stressful and time-sensitive sale process. Advisors can provide insights into the nuances of IOIs and LOIs, assist in negotiations, and ensure that the seller’s interests are protected. They also play a vital role in drafting and reviewing the final purchase agreement and other transaction documents.

Both IOIs and LOIs may include contingencies and conditions that must be met for the transaction to proceed. Sellers should carefully review these conditions to understand their implications and ensure they are achievable. Common conditions include obtaining regulatory approvals, securing financing, and completing satisfactory due diligence. Sellers should also consider post-transaction implications, such as transition periods, employee retention, and potential earn-out provisions. Negotiating favorable terms for these aspects can ensure a smoother transition and continued success for the business.


In summary, the IOI typically acts as a preliminary, non-binding expression of interest, providing a high-level overview of the potential deal. While the LOI is generally a more formal and detailed document, often containing binding provisions that set the stage for a definitive purchase agreement. But in either case, it is important for bother buyers and sellers to be clear about the expectations and obligations during the negotiation process.

Please remember that these are general descriptions of an LOI vs. IOI. So, whichever is presented, sellers need to examine the actual terms. What may be titled or referred to as an IOI may be closer in substance to an LOI. For example, the IOI could have an exclusivity clause prohibiting a seller from discussing a potential sale with other buyers.

Understanding the differences between these documents and the strategic considerations associated with each is crucial for sellers. By carefully evaluating buyer credibility, negotiating favorable terms, protecting confidential information, and engaging experienced advisors, sellers can navigate the complexities of the transaction process and achieve a successful sale.

If you need assistance  with a Letter of Intent or Indication of Interest contact Eric Sarmiento at  216-621-7860.

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