The indication of interest (IOI) is a non-binding document prepared by the buyer and delivered to the investment banker representing the transaction to communicate interest in the investment opportunity presented. In the absence of an investment banker representing the transaction, the buyer would deliver the IOI directly to the seller. At this stage valuation is the single most important variable to communicate, and it is most often communicated as a range. An example of the language used to indicate range follows:

Based on the information provided in the Confidential Memorandum, we believe that a fair enterprise value for [ABBREV. NAME] is approximately 0.0x to 0.0x adjusted 20XXE EBITDA of $XX.X million, or between $XXX.X million and $XXX.X million. The enterprise value assumes a cash free debt free transaction.  We would expect the purchase consideration to be primarily, if not entirely, in the form of cash.

Typically, and per the language above, private equity firms and other bidders are asked to develop this valuation range based on the information provided in the confidential information memorandum. In addition to this information there is likely to be an opportunity to connect with the investment banker to ask questions and learn more about the business. Occasionally, though far less frequently, there is also an opportunity to speak directly with management before submitting a bid. 

This limited amount of information limits the analysis required to arrive at this valuation range. Typically, valuation methodology at this stage would be limited to comparable transaction analysis and a very simple LBO model. Frequently, however, it is limited to the former. As the lesson covering private equity sourcing strategy suggests, finding the right opportunity requires looking at hundreds of opportunities, and this process generally gives private equity investment team members a strong framework for short-hand valuation estimates. 

Information Requested by Seller

Beyond valuation, the investment bank and the seller will be interested in the private equity firm’s ability to fund and finance the deal. Valuation and the ability to close are the most important factors to a seller at this stage, but for a comprehensive list, the items that follow might also be requested:

• Valuation: Expressed as a dollar value range and as a multiple of EBITDA range.
• Funds: The amount of dry powder or access to capital available to close the transaction.
• Financing: The capital partners the private equity firm intends to work with to secure financing, and an idea of capital structure.
• Timeframe to Close: An estimate of how long it will take to close the transaction.
• Management Compensation: The management retention plan and the role the private equity firm intends to play post acquisition.

This request will generally be delivered via an “instruction letter” from the investment bank coupled with a deadline for submission. 

IOI Format

This lesson includes an IOI template that has been used many times on live transactions. At this stage it is rare to have a process require much more than this template provides. The private equity firm’s reputation and the range at which they are willing to pursue the investment should largely suffice. 

As you will see in the attached document, the simple one-page IOI comments mostly on valuation and the intention to work with the current management team. As it relates to the latter, this language is vague. The rationale is simple, at this stage little information has been provided and typically there has been little interaction with the management team, if any. It is possible to encounter a process that requires substantially more detail, but otherwise this should suffice. 

If the investment banker or seller determines that your offer is of interest, but that it is lacking information, they will schedule a call to collect a few additional data points. Typically this call will take place even if all of the requests in the instruction letter are included in the indication of interest. 

As the lesson that follows will demonstrate, exactly how eager each of the bidders is to win the auction is valuable information for the investment banker leading the process. So long as your indication of interest touches on the important variables, and the valuation range is attractive, interest will have been effectively communicated.

Please see the PDF notes for an example of an IOI template.