LOI & Indication of Interest
How buyers express interest and structure preliminary offers in a competitive process
~15 min read
After screening an opportunity and reviewing the CIM, a PE firm that wants to continue pursuing a deal must put a proposal in front of the seller. This happens in two stages: the Indication of Interest (IOI) and the Letter of Intent (LOI). These documents serve different purposes at different points in the process, and understanding the distinction is critical for anyone working in private equity.
The IOI is the first written expression of a buyer's interest. The LOI is a more serious, more detailed document that typically comes after management presentations and preliminary diligence. Getting these documents right is a competitive skill: in a well-run auction, the quality of your IOI or LOI can determine whether you advance to the next round or get cut from the process.
IOI vs. LOI: Two Stages of Expressing Interest
An Indication of Interest (IOI) is a preliminary, non-binding letter submitted during the first round of an auction. It signals that the buyer is seriously interested and provides a valuation range (not a specific price), a high-level view of the proposed deal structure, a description of the buyer's relevant experience, the financing approach, and an outline of the expected diligence process. IOIs are intentionally broad because the buyer has limited information at this stage.
A Letter of Intent (LOI) is a more detailed, semi-binding document submitted during the second round after the buyer has attended management presentations and completed preliminary diligence. The LOI includes a specific purchase price or narrow range, detailed deal structure (equity vs. debt split, rollover requirements), a markup of key terms from the purchase agreement, the exclusivity period requested, conditions to closing, and a timeline for confirmatory diligence. While most LOI terms are non-binding, the exclusivity and confidentiality provisions are typically binding and enforceable.
| Dimension | IOI (First Round) | LOI (Second Round) | |
|---|---|---|---|
| Timing | After CIM review, before management meeting | After management meeting and preliminary diligence | |
| Valuation | Broad range (e.g., $150M-$180M EV) | Specific price or narrow range (e.g., $170M EV) | |
| Binding status | Entirely non-binding | Non-binding on price, but exclusivity and confidentiality clauses are binding | |
| Level of detail | 2-4 pages, high-level summary | 5-15 pages with markup of key purchase agreement terms | |
| Purpose | Get invited to management presentations and the next round | Win exclusivity and move to confirmatory diligence | |
| Competitive field | 10-20+ bidders submitting IOIs | 2-4 bidders submitting LOIs |
Key LOI Terms That Matter
While the LOI is mostly non-binding, its terms set the framework for the definitive purchase agreement. Sellers pay close attention to these elements when choosing which bidder to grant exclusivity to:
- Purchase price and structure. Cash at close vs. rollover equity vs. earnouts. Sellers strongly prefer certainty: an all-cash bid at $170M will often beat a $180M bid that includes a $20M earnout tied to uncertain future performance.
- Financing contingency. Does the buyer's offer depend on securing debt financing? A bid with committed financing is more credible than one with a 'financing contingency,' which gives the buyer an exit if lenders back out.
- Exclusivity period. The buyer requests a window (typically 45-90 days) during which the seller agrees not to negotiate with other parties. This gives the buyer time to complete confirmatory due diligence without worrying about competitive pressure.
- Conditions to closing. What must happen before the deal closes? Common conditions include satisfactory completion of due diligence, board and LP approvals, regulatory clearance (e.g., Hart-Scott-Rodino), and no material adverse change in the business.
- Break-up fee. In some deals, the parties negotiate a fee (typically 1-3% of deal value) payable if one side walks away without cause after signing the LOI or definitive agreement. Break-up fees protect the party that continues to invest time and resources in good faith.
- Management rollover. Does the buyer expect the existing management team to reinvest a portion of their proceeds into the new entity? This aligns management incentives but reduces the seller's immediate cash payout.
Competitive Auction Dynamics: From First Round to Exclusivity
First-round bids (IOIs)
10-20+ buyers submit preliminary IOIs with valuation ranges and high-level terms. The sell-side advisor evaluates each IOI on price, credibility of financing, buyer track record, and strategic fit. The field is narrowed to 4-8 bidders who advance to management presentations.
Management presentations
Remaining bidders meet with the company's leadership team for 2-4 hours of in-depth Q&A. This is the buyer's chance to assess the quality of the management team and refine their investment thesis. Bidders may also receive access to a virtual data room with additional financial and operational detail.
Second-round bids (LOIs)
After presentations and preliminary diligence, 2-4 remaining bidders submit detailed LOIs with specific pricing, a markup of the purchase agreement, and proposed exclusivity terms. This is the 'best and final' round in most processes.
Seller evaluation and exclusivity grant
The seller and their advisor evaluate LOIs on total value, certainty of close, speed, and terms. The winning bidder receives an exclusivity agreement (typically 45-90 days) to complete confirmatory due diligence and negotiate the final purchase agreement. Other bidders are placed on hold or eliminated.
First-round bids (IOIs)
10-20+ buyers submit preliminary IOIs with valuation ranges and high-level terms. The sell-side advisor evaluates each IOI on price, credibility of financing, buyer track record, and strategic fit. The field is narrowed to 4-8 bidders who advance to management presentations.
Management presentations
Remaining bidders meet with the company's leadership team for 2-4 hours of in-depth Q&A. This is the buyer's chance to assess the quality of the management team and refine their investment thesis. Bidders may also receive access to a virtual data room with additional financial and operational detail.
Second-round bids (LOIs)
After presentations and preliminary diligence, 2-4 remaining bidders submit detailed LOIs with specific pricing, a markup of the purchase agreement, and proposed exclusivity terms. This is the 'best and final' round in most processes.
Seller evaluation and exclusivity grant
The seller and their advisor evaluate LOIs on total value, certainty of close, speed, and terms. The winning bidder receives an exclusivity agreement (typically 45-90 days) to complete confirmatory due diligence and negotiate the final purchase agreement. Other bidders are placed on hold or eliminated.
How an LOI Is Won: Price Is Not Everything
Three PE firms submit LOIs for a $50M EBITDA specialty manufacturing company:
- Firm A bids $550M (11.0x EBITDA), all cash, 60-day exclusivity, committed financing from a top-tier lender, and no financing contingency.
- Firm B bids $575M (11.5x EBITDA) but includes a $40M earnout tied to two-year revenue targets, a financing contingency, and requests 90-day exclusivity.
- Firm C bids $560M (11.2x EBITDA), all cash, 45-day exclusivity, committed financing, and provides a detailed markup of the purchase agreement with clean terms.
The seller awards exclusivity to Firm C. Even though Firm B had the highest headline number, the earnout component and financing contingency introduced uncertainty. Firm A had good certainty but its 60-day timeline and higher price did not compensate for Firm C's cleaner terms and faster execution plan. In PE auctions, certainty of close and deal terms frequently outweigh a 3-5% price differential.
Composite example based on middle-market auction outcomes
Quiz: LOI & Indication of Interest
6 questions · ~3 min