Quick answer: An indication of interest, or IOI, is a buyer’s non-binding first-round statement of the price range it might pay, the structure it assumes and what it must still confirm. It comes before the letter of intent and before the buyer has seen detailed data. Ranges and assumptions can hide differences in debt treatment, working capital, financing and diligence needs, so compare IOIs on estimated net proceeds and likelihood of closing, not the highest headline.
Key points
- An IOI is a screening tool. It tells the seller which buyers to invite to management meetings, and it binds no one.
- A range is a negotiating position. The assumptions beside it show how much of the range is real.
- Compare bidders on one basis: enterprise value, debt-like items, working capital, form of payment, financing and approvals, converted to estimated net proceeds and weighed for certainty.
- A field that narrows too early gives up competition before the letter of intent, so sellers often advance more bidders than they expect to need.
What an indication of interest states
An indication of interest is a buyer’s written, non-binding statement, submitted after it has read the information memorandum, of what it might pay and how. It sits between the first call and the letter of intent. The seller uses it to decide which buyers to meet, and the buyer uses it to signal seriousness without committing. A process letter from the advisor, described in the guide to buyer outreach, usually tells bidders what the document must address. A well-formed one states:
- Value. A range of enterprise value, or a single figure, and the earnings number it rests on.
- Basis. Whether the price assumes a cash-free, debt-free business and a normal level of working capital.
- Form of payment. How much is cash at closing and how much is a seller note, rollover equity or an earnout.
- Funding. Where the money comes from: a committed fund, the buyer’s balance sheet, bank debt that is arranged or only discussed.
- Approvals. Who must sign off, such as an investment committee, a board or partners.
- Diligence needs. What the buyer must verify, with which advisors, and what could change the price.
- People. The role it expects from the owner and its plans for management and employees.
- Timetable. The steps it needs between now and signing.
The document is non-binding because the buyer has not yet seen the data room and cannot commit to a number its own diligence may change. That freedom runs both ways, and it makes a range cheap to submit. The guide to reading a letter of intent covers the document that follows, where terms begin to carry weight.
Why a range and a headline mislead
A range has two ends for a reason. The low end is roughly where the buyer expects to land, and the high end is what it will pay if diligence confirms everything it has been told. Buyers also apply their multiple to their own view of earnings, which may exclude add-backs the seller counted. Two bidders can therefore quote the same range on different earnings, or different ranges on the same earnings, and the headline shows neither.
The assumptions are where the difference sits. The table lists what to read for in each.
| Assumption | What to read for | How it moves the check |
|---|---|---|
| Earnings base | Which adjusted EBITDA the multiple is applied to and which add-backs the buyer accepts | A lower accepted figure cuts the price at the same multiple |
| Debt and debt-like items | Whether unpaid bonuses, deferred compensation, customer deposits and similar items are subtracted | Each item treated as debt comes straight off proceeds. See the bridge from enterprise value to equity value |
| Working capital | Whether a target is stated, how it is set and which accounts count | A higher target takes cash from the seller at closing. See the working capital peg guide |
| Form of payment | The split between cash at closing, notes, rollover and contingent payments | Deferred and contingent amounts are worth less than their face value. See earnouts |
| Structure | Whether the buyer assumes an asset purchase or a stock purchase | The structure changes after-tax proceeds, so the seller’s CPA should compare the alternatives. See the comparison of asset and stock sales |
A scoring matrix for advancing bidders
Net proceeds come first, but they are not the only criterion. A bidder with the highest estimated check and a financing plan that exists only in conversation is a different proposition from one with slightly less and a committed fund. Rate each bidder strong, adequate or weak on every row, and give the first three rows the most weight.
| Criterion | A strong indication shows | A weak indication shows |
|---|---|---|
| Net proceeds | An estimate that survives conversion to cash at closing after debt-like items, working capital and fees | A headline that depends on assumptions the seller cannot verify |
| Certainty of payment | Most of the price in cash at closing | A large share deferred, contingent or reinvested |
| Funding and approvals | Committed capital, a named lender in active discussion, one clear decision path | Funding described as “expected,” several approvals still ahead |
| Diligence burden | A specific list of items and a stated plan for confirming them | Open-ended confirmatory work with no scope |
| Buyer credibility | A record of closing similar transactions, a clear reason for wanting this company | No comparable history, or a rationale that does not fit the business |
| Owner’s role | Terms that match what the owner wants after closing | Expectations that conflict with the owner’s plans |
| Timetable | Dated steps that match the process | Vague timing, or timing that needs exclusivity from the first day |
Weights reflect the seller’s goals. An owner who needs certainty or a short transition weighs the middle rows more heavily than one who can wait for a larger, riskier payout.
Comparing two indications on net proceeds
The next example converts two indications to the same basis. It is the arithmetic a headline price hides.
Illustrative example: Two first-round indications, converted to estimated cash at closing
An owner’s company has adjusted EBITDA of $3,000,000 as presented. It has $2,000,000 of bank debt and $500,000 of cash that stays in the business. The owner’s own list of debt-like items totals $300,000. Buyer A submits a range of $21,000,000 to $24,000,000, and Buyer B submits $19,500,000 to $21,500,000. The midpoints are $22,500,000 and $20,500,000.
Buyer A would pay $17,500,000 in cash at closing and $5,000,000 as an earnout two years later. Its debt-like definition is broader, adding $600,000 to the owner’s list, so it subtracts $900,000. It names no working capital target, and the owner estimates that the likely target would leave a $400,000 shortfall. Its lender has not been engaged. Buyer B would pay $20,500,000 in cash at closing, subtracts the owner’s $300,000 of debt-like items, and states a working capital method that matches the owner’s history. Its fund has committed the equity.
| Estimated cash at closing, before fees and taxes | Buyer A | Buyer B |
|---|---|---|
| Enterprise value paid in cash at closing | $17,500,000 | $20,500,000 |
| Less bank debt repaid | ($2,000,000) | ($2,000,000) |
| Less debt-like items | ($900,000) | ($300,000) |
| Less working capital shortfall | ($400,000) | $0 |
| Plus cash left in the business | $500,000 | $500,000 |
| Estimated cash to the owner at closing | $14,700,000 | $18,700,000 |
Buyer A’s midpoint is $2,000,000 higher than Buyer B’s, but its estimated check at closing is $4,000,000 lower. The $5,000,000 earnout has to cover that gap. If the owner puts a 50 percent chance on being paid in full, the earnout is worth $2,500,000 before discounting for time, and Buyer A’s total is $17,200,000, which is $1,500,000 below Buyer B’s closing cash alone. Buyer A matches Buyer B only if the owner is 80 percent sure of the full earnout, and it carries a financing risk that Buyer B does not. The numbers are invented to show the mechanics and are not benchmarks.
Questions to put to every bidder before meetings
Ranges become comparable when each bidder answers the same questions in writing before it is invited to meet. Doing so also tests who is anchoring: a buyer that cannot say what would move it from the low end to the high end may be bidding high to win a place and expecting to reduce the price later, the pattern covered in the guide to retrades after the letter of intent.
- Which earnings figure and which add-backs does the price assume?
- How does the buyer define debt-like items, and what working capital target does it assume?
- What part of the price is paid at closing, and what part is deferred, contingent or reinvested?
- Who funds the purchase, and which approvals remain?
- What must the buyer verify in diligence, with which advisors?
- What role does the buyer expect from the owner and the management team?
The answers decide which bidders advance. A seller usually invites more bidders than it expects to need, because offers move once buyers see the business and a short list that is too short gives up competition before the letter of intent. The stage ends when a handful of bidders meet management and one is chosen. The guide to how to sell a business shows what follows, including the exclusivity that the chosen letter of intent usually carries.
Frequently asked questions
What is an indication of interest in M&A?
A written, non-binding statement from a prospective buyer, submitted after it has read the information memorandum, of the price range it might pay, how it would pay and what it needs to verify. It lets the seller compare buyers before choosing whom to invite to management meetings. It does not oblige either side to proceed.
What is the difference between an indication of interest and a letter of intent?
An indication of interest comes first, is usually a range, and rests on limited information. A letter of intent comes after management meetings, states a more specific price and structure, sets a diligence plan and usually grants exclusivity. The first screens buyers, and the second commits the seller to one of them for a period.
Is an indication of interest binding?
Generally not on price or terms. The document usually says so, and a buyer can revise or withdraw it. Confidentiality duties from the non-disclosure agreement continue separately. Because nothing binds the buyer, a high range proves little until its assumptions, financing and approvals are tested, and the seller’s attorney can confirm what any given document does bind.
Why do indications of interest come as ranges?
The buyer has seen a summary, not the data room. A range reflects uncertainty about earnings quality, working capital and debt-like items, and it leaves room to adjust after meetings. Sellers should ask which assumptions sit behind the low and high ends, because those assumptions show where in the range a final offer is likely to land.
How many bidders should be invited to management meetings?
Enough to keep competition alive until the letter of intent, and few enough that each meeting is worth the owner’s time. The right number depends on how many offers cluster near the top and how different their structures are. A seller who narrows to one bidder at this stage gives up leverage early.
Should the highest indication of interest win?
Not by default. A higher headline can carry a financing condition, a broad definition of debt-like items, a higher working capital target or more of the price paid later. Convert each indication to estimated net proceeds at closing and weigh certainty alongside it. The highest price that is unlikely to close is worth less than a lower, firmer one.
Thinking about a sale or an acquisition?
The Impetus Group provides sell-side and buy-side M&A advisory, from preparation and buyer outreach to negotiation and closing. A transactional valuation is often the first step, scoped and priced separately.
Related guides
- How to Read a Letter of Intent: The Terms That Decide What You Receive: A plain-language guide to the letter of intent in a business sale: price, structure, working capital, exclusivity, diligence and the terms that move your proceeds.
- From Enterprise Value to Equity Value: What the Owner Receives: Enterprise value is the price of the business. Equity value is what owners receive after debt, debt-like items, cash and working capital. See the bridge.
- Net Working Capital Peg: How the Working Capital Adjustment Works: The working capital peg sets the level of working capital a seller must leave in the business at closing. See how it is calculated, negotiated and adjusted.
- Earnouts Explained: How Contingent Consideration Works in a Sale: An earnout ties part of the purchase price to future results. Learn how earnouts are structured, why buyers propose them and how sellers can value the risk.
- Buyer Outreach in a Sale Process: Reaching Buyers Without Breaking Confidentiality: How a confidential sale reaches buyers: blind teasers, NDAs, call sequencing, contact logs, broad versus targeted outreach and what to do if word leaks.
- How Long Does It Take to Sell a Business? Phase by Phase: How long a business sale takes depends on its slowest phase. See what controls each stage, where delays occur and what shortens the path.
This guide is general education. It is not a valuation opinion, appraisal, investment advice, or legal or tax advice. How these guides are made.