We will explore in this article the intricate and sometimes rather nuanced process of the Two-Step M&A Bidding Procedure. The aforementioned includes Step 1) a document called an Indication of Interest (IOI), and Step 2) likewise a document named Letter of Intent (LOI).
Fear not, this won't be another legal deck-sized text but a rather clear and simplified guide through the two-step bidding formal outline regarding selling a business.
So, let's begin.
Introduction
As mentioned in the preface, if you will, the IOI and LOI are two key legal and strategic components of how the selling of a business works. Legal in the way that, although non-binding (LOI sometimes legally binding, but more on that later), they give a formal framework under which the M&A process from start to finish is worked through. Strategic in a way that gives the selling company leverage since it gives buyers a competitive tension and a strict timeline under which they operate.
While IOI is the first bid that prospective buyers will submit for the acquisition of a company, LOI is the second and typically final (again, some parts can be legally binding) offer in the M&A process.
Think of IOI as a rough outline of a transaction, while LOI is a concrete-framed architecture of the deal.
The timeline of the deal, for the purpose of this article, will only include the following:
1) Teaser > 2) IOI > 3) NDA > 4) Pitch Deck > 5) LOI
Of course, an LOI is followed by a legally binding 6) Purchase Agreement, 7) Financing of the Deal, 8) Closing, and 9) Post-Closing Integration. But the remainder is maybe for another article.
Now that we've outlined this, IOI and LOI will be analyzed.
Let's move on to unpacking the IOI and LOI intricacies, as well as see how it fits into the bigger picture.
Indication of Interest (IOI)
M&A advisors on the selling side of the transaction will usually send teasers to potentially interested buyers, early on in the process. A teaser is seldom a big document, but rather a 2-3, maximum 4-page outline of themes such as transaction summary, financial overview of the selling company's past few years, and key investment highlights and comparative advantages of investment bankers' client.
Following the teaser's review, a prospective buyer if interested will send out an IOI, or the first bid, to the seller's advisors. IOIs are typically high-level, one-to-two-page documents, and will generally include a brief overview of the firm submitting the bid, why they would be a suitable acquirer, and what they are willing to pay for the company.
There will often be a buyer firm's valuation range present of the selling company instead of a point number. The reason is that buyers will still have to undergo the due diligence phase in order to come up with a more precise description of the company's value or a single number if you will. It should be noted that buyers in both ranges (IOI) and single number (LOI) valuations often use multiples of the company's value (i.e. a multiplier of EBITDA or revenue).
The natural progression of the deal will include a sent NDA (Non-Disclosure Agreement) from the sell-side parties, and after signing, the buyers will receive a Pitch Deck: an expanded type of teaser counting often at least 15-20 pages/ slides.
If the pitch deck succeeds in intriguing the buyer to recognize a deal's value, the former will motivate the latter to continue with an LOI.
Letter of Intent (LOI)
As previously dubbed "the architecture of the deal," the LOI states the acquirer's purchase price proposition. Besides the chief part of this document, there are other attributes that need mentioning:
1) Sources of capital - where the acquirer will get the funds to finance the deal
2) Percentage of the company the acquirer plans to purchase - formalizes whether the owner will stay/ retain a portion of a company or not
3) Types of consideration/ types of payment - cash, stock, seller’s note, and the like
4) Escrow holdback - types of financial mechanisms such as warranties and the like, agreed by the seller to protect the buyer when and after completing the transaction
5) Any contingencies to the purchase - terms that enable the buyer to exit/ renegotiate the deal if some conditions are later discovered not to be met, i.e. new due diligence information deemed unsatisfactory or financing aspect such as the buyer not being able to secure acquisition financing
6) Due diligence items and timelines include usually 5 aspects of analyzing the purchasing company and 4 time periods:
- Financial Due Diligence: audited financial statements for the past 3-5 years, recent unaudited fin. statements, details of all outstanding debts, investments, and contingent liabilities, analysis of revenue, margins, and key financial ratios
- Legal Due Diligence: list of all current litigation and legal disputes, employment agreements, patents, trademarks, copyright documentation, regulatory compliance, and any past or pending violations, property, plant, and equipment leases, or ownership documents
- Operational Due Diligence: an overview of operational processes and efficiency, details of the supply chain, major suppliers, and contracts, employee structure, key personnel, organizational chart, IT systems, and cybersecurity measures
- Market Due Diligence: analysis of the market and competitive position, details of key customers, and sales pipeline, marketing strategies and distribution channels, industry risks, and growth prospects
- Strategic Fit: how the business aligns with the strategic goals of the acquirer, potential synergies, integration plans, culture and values assessment
4 time periods -
- Weeks 1-2: initial data collection and review
- Weeks 3-4: in-depth analysis.
- Weeks 5-6: final evaluation and reporting
- Week 7: decision-making; based on the due diligence findings, the buyer will make an informed decision on whether to proceed, renegotiate terms, or abandon the acquisition
The LOI is not limited to these terms but the aforementioned are usually the ones to appear. As seen from the description, although legally non-binding in its nature, an LOI has some legally binding items i.e. contingencies/ escrow holdback for the purchase. It's worth mentioning that another legally binding term could be that during a period of exclusivity, the seller may not discuss or negotiate with other buyers.
Once the most suitable group is selected by the seller and an agreed-upon LOI is signed by both parties, these few terms are generally binding. LOIs are submitted to, before, or on a date set by the sellers and their investment bankers.
LOI deadlines are perhaps the most exciting part of the dealmaking since it's just "one step away" from being offered a (legally binding) purchase price, and the soon closure of the deal that follows.
Differences and Concluding Thoughts
The key difference between an IOI and an LOI perhaps could be compared to the difference between a Teaser and a Pitch Deck, the comparison being similar but not the same in nature.
As a teaser comes before an NDA, so does the IOI, with IOI showing potential entrance into a deal from the buyer's end, while a teaser is a compelling summary of why the former should consider the deal.
Both the pitch deck and LOI come after the NDA is signed, with the transaction timeline becoming more mature and the LOI, again, besides coming into the frame after the NDA is signed, can include some legally binding aspects, unlike the IOI which has none.
Both the Indication of Interest/ IOI and Letter of Intent/ LOI are indispensable parts of the legal/ strategic dealmaking frame, and knowing its lingo is a prerequisite for investment bankers to advise their sell-side clients to the best of their abilities.