Using the IOI to Save Time and Maximize Value in Your Business Sale

As any good investment banker will tell you, when you’re selling your business, one of your first key objectives must be to identify serious potential buyers. Distinguishing truly interested parties from window shoppers is vital to save time and engage with the more serious acquirers.

Once you begin marketing your business for sale, your investment banker will typically use two documents to narrow the field of potential buyers: the indication of interest (IOI) and the letter of intent (LOI). The goal of an IOI is to determine which buyers have a realistic view of your business’s value. In addition to demonstrating the potential acquirer’s view of value, the nonbinding IOI provides essential information to help you determine whether the prospective buyer is a good fit to buy your business. You should expect to receive IOIs about four weeks after you have begun the sale process.

Once you’ve selected a single buyer, you’ll both sign an LOI. This document represents a nonbinding commitment between you and the buyer to enter the final phases of a transaction.

Because potential buyers must have specific information about your business in order to produce these documents, they must first sign a nondisclosure agreement (NDA). You’ll want to obtain a signed NDA from any interested party before they review the marketing material. After they sign the NDA, you’ll give them instructions detailing what to include in their IOI and when it is due. Your investment banker will handle all correspondence between buyers at this stage, including the execution of NDAs and distribution of marketing materials and instructions for submitting an IOI. These instructions will outline what aspects of a buyers offer you will consider most heavily in deciding who will move on to the next phase of the process.

Information requested in an IOI

1. Proposed value
   Sellers typically ask buyers to provide a value that reflects the company’s past financial performance, expected growth, opportunities, and potential synergies. Buyers will typically express a value range either in dollars or as a multiple of EBITDA. Buyers strive to provide their most accurate valuation estimate to ensure their price is competitive enough to be considered.
   
   Differing value expectations is one of the most common reasons transactions do not close. Recognizing the price a buyer expects to pay will help you determine who is the best fit to buy your company. The value proposals provided in IOIs may also help guide sellers who harbor unrealistic value expectations. This information helps you align expectations with the market while choosing the party that will provide the most value.
   
2. Transaction structure
   An IOI typically includes a high-level proposal for a deal structure and expectations for a seller’s transition out of the company. Buyers may include details about cash and stock components they’d like in the transaction, along with an indication of whether the purchase would be an asset or stock transaction. A buyer may also outline any financial contingencies that will need to be met before closing.
   
   Learning about the buyer’s proposed transaction structure helps you understand the buyer’s expectations for your involvement in the company post-acquisition. Most buyers typically want to keep the owners around for a period following the transaction to ensure a smooth transition. Depending on whether your goal is to exit entirely or to maintain partial ownership, this portion of the IOI will help you decide who gets knocked out and who goes on to the next round.
   
   
3. Strategic fit
   An important part of the IOI is the buyer’s description of their background, why they are a good fit for the transaction, and their vision for the business. As the seller, you may want to know that the new owner will protect your brand, legacy, and employees.

Why is an IOI important?

Receiving the information outlined in an IOI is a critical step in the sale process, even though the document is nonbinding. An investment banker will reach out to many buyers to maximize the ultimate value you receive for your business. This value must be worth the time required to maximize it. An IOI enables sellers to contact many buyers and then quickly narrow them down so that you focus only on the parties most likely to close a transaction.

Using an experienced investment banker to navigate this process can save time while ensuring you get the most value for your business.