Indication of Interest (IOI)

Indication of Interest (IOI) refers to a brief letter expressing the buyer's interest in buying securities that are still in the underwriting stage of being registered. It's a non-binding, conditional agreement that is often stated by a buyer.

IOIs can help inform the seller about the potential buyers to whom they should be dedicating resources. These documents not only narrow down the interested buyers but also help the seller assess a buyer's willingness and ability to pursue a transaction.

How does Indication of Interest Work?

IOI is used during the purchase of securities to express the interest of a buyer in a property that is yet to be approved or issued by the concerned authorities. In the finance and securities world, an IOI is typically expressed before an Initial Public Offering (IPO). It is conditional and non-binding interest because it is illegal to sell a security that is still in the registration process. While at it, know that IOIs are open-ended and aren't a commitment to buy the property.

What is Included in IOI Notice?

IOIs are presented with limited information, including the expressions of trading interest. It's completed before prospective buyers have visited and walked through the diligence process. Here's what an IOI often includes:

• Estimated timeline: Gives the seller an idea of the time required to proceed through due diligence and seal the deal.
• Valuation: Price of the property that can be provided as a multiple of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA).
• List of due diligence items that the seller needs to submit: These can be related to legal, human resources, finance, consumer contracts, or others.
• Funding sources: Outlines the buyer's plan in financing the purchase, mentioning the source or type of funds.
• Transition and support services: Details a buyer's need for transaction support.

IOI in Mergers and Acquisitions

When two different entities combine forces to create one joint organisation, it is known as a merger, whereas an acquisition occurs when an entity is taken over by the other. IOI plays an important role during mergers and acquisitions. However, here it takes a slightly different approach from when used in investments and finances. In a merger and acquisition, IOI reports the interest of an acquiring company or buyer in purchasing a company.

An IOI used for mergers and acquisitions should state the following:

• Buyer's interest in purchasing the security
• The source of financing the merger and acquisitions
• The price Range
• Expected timeframe of the transaction among other factors

Takeaway

IOIs can benefit both buyers and sellers in securing a promising deal. While assessing IOIs, a seller should consider the buyer's ability to finance a transaction, the proposed timeline, and post-closing policies, among other aspects. Herein, experienced deal advisors can help sellers evaluate IOIs based on receipts, using Industry knowledge and comparables to select to enter the next stages of negotiations. Only the potential buyers. On the other hand, a buyer should create an IOI including relevant information and key points to formulate a transparent process and a successful deal.