A buyer says they are prepared to pay $40 million for your company. That number gets your attention. But before treating it as an offer, ask one question: is it an indication of interest or a letter of intent? The difference between an indication of interest vs LOI is not just paperwork. It changes how much information you disclose, how many buyers remain in the process, and how much negotiating power you keep.
For a founder selling for the first time, both documents can look encouraging. Both may state a price range, describe a proposed structure, and outline a path to closing. Neither is usually a definitive purchase agreement. Yet an indication of interest is generally an early expression of interest. An LOI is the document that often puts a buyer in the driver’s seat, particularly once exclusivity begins.
Indication of Interest vs LOI: The Practical Difference
An indication of interest, often called an IOI, is an initial written statement from a buyer. It usually follows a review of a short confidential information memorandum, financial highlights, and one or more management discussions. The buyer has not completed full due diligence, which is the detailed review of financial, legal, operational, and commercial risks.
An IOI commonly includes a proposed valuation range, a broad description of consideration, and the buyer’s rationale. For example, the buyer may propose $35 million to $42 million, with 80 percent paid in cash at closing and 20 percent subject to further discussion. It may identify whether the buyer expects an earnout, which is a future payment tied to post-closing performance, or a vendor take-back note, which is financing provided by the seller to the buyer.
The range and qualifications matter. At the IOI stage, a buyer may still be comparing your company with other opportunities and may have limited information about customer concentration, normalized earnings, working capital requirements, or capital expenditures. The buyer is signaling interest, not making a final commitment.
A letter of intent, or LOI, comes later. It sets out the principal economic and legal terms on which the buyer proposes to acquire the business. The document may remain largely nonbinding as to the obligation to close, but several provisions are typically binding. Those often include confidentiality, exclusivity, access to records, expenses, governing law, and sometimes a break fee or deposit arrangement.
The LOI is where a headline price becomes a deal structure. A $40 million LOI can produce a very different result from another $40 million LOI if one requires a $6 million earnout, a large working capital target, rollover equity, or broad indemnity obligations. The business owner should read past the first number.
What an IOI Should Tell You
A well-run sale process uses IOIs to create informed competition without giving every interested party unrestricted access to sensitive information. At this point, you want to learn which buyers are serious, credible, and aligned with what matters to you.
Price is one factor, but it is not enough. An IOI should provide a useful first view of the buyer’s proposed form of consideration, financing approach, anticipated diligence process, expected role for the owner after closing, and key assumptions. It should also identify the buyer. A strategic acquirer, private equity firm, family office, and search fund can all approach the same company differently.
A strategic buyer may see value in your customers, geographic presence, product capabilities, or management team. A financial buyer may focus more closely on recurring cash flow, management depth, growth initiatives, and its ability to finance the transaction. Neither type is automatically better. The right choice depends on the owner’s goals, the company’s risks, and the terms offered.
An IOI is also an opportunity to identify weak buyers early. A high range with vague funding sources, no transaction history, or an unrealistic diligence timetable may not be worth advancing. Similarly, a buyer that insists on contacting customers or employees before establishing a credible basis for negotiations can create unnecessary risk.
For this reason, owners should not view an IOI as a prize for generating interest. It is a screening tool. The objective is to select a small group of qualified parties for deeper diligence while preserving alternatives.
Why the LOI Deserves More Time Than Most Owners Give It
Once you sign an LOI with exclusivity, you usually agree not to solicit or negotiate with other buyers for a defined period. Thirty to 90 days is common, though the appropriate period depends on the complexity of the company, financing needs, regulatory issues, and cross-border considerations.
This is the point at which leverage can shift. The buyer receives more detailed financial statements, contracts, customer data, employment information, tax records, and access to management. Meanwhile, competing buyers are generally sidelined. If the buyer later asks to reduce the price or change terms, the owner may face a difficult choice: accept the change, renegotiate, or restart a process that has already demanded significant time and attention.
That does not mean exclusivity is always a mistake. A serious buyer needs a reasonable opportunity to complete diligence and prepare definitive documents. But exclusivity should be earned. Before granting it, the parties should have enough alignment on the major issues that neither side is surprised by the basic transaction structure.
The LOI should address more than purchase price. It should be clear about whether the transaction is an asset sale or equity sale, how debt and cash are treated, the amount of working capital expected at closing, and whether the stated price is subject to a closing adjustment. In a working capital adjustment, the seller delivers a normalized level of receivables, inventory, payables, and other operating accounts. If the delivered amount falls below the agreed target, the purchase price may be reduced.
The document should also state whether there is an earnout, rollover equity, deferred consideration, or a vendor take-back note. If an earnout is proposed, the terms need early attention. The relevant performance measure, duration, accounting policies, control over operations after closing, and dispute process can determine whether that future payment is realistic or merely theoretical.
A Higher Price Can Still Be the Worse LOI
Owners naturally focus on the number. Buyers know that. A buyer may offer the highest headline value while attaching conditions that put meaningful value at risk.
Consider two proposals. Buyer A offers $38 million in cash at closing, subject to a standard working capital adjustment and defined indemnity limits. Buyer B offers $42 million, but only $30 million is paid at closing, $7 million depends on an earnout, and $5 million is rolled into the buyer’s new holding company. Buyer B may still be the better partner, but its offer is not simply $4 million better. It has a different risk profile, tax profile, and liquidity outcome.
The same applies to diligence conditions. An LOI that allows a buyer to terminate for any reason after 75 days creates more uncertainty than one tied to defined diligence areas and a disciplined process. Broad phrases such as “satisfactory due diligence” are common, but they should not replace a clear understanding of what remains to be verified.
Owners should also consider certainty of closing. Is the buyer funded? Does it need third-party debt financing? Is approval required from an investment committee, lender, partner group, or board? What experience does the buyer have completing acquisitions of comparable complexity? A buyer can be sincere and still lack the ability to close on the proposed terms.
How to Move From IOI to LOI Without Losing Control
The strongest position is built before an LOI arrives. Financial reporting should be current and supportable. One-time expenses, owner compensation, related-party transactions, and nonoperating items should be identified and documented. Customer contracts, leases, intellectual property, employee arrangements, and corporate records should be organized before a buyer requests them.
A controlled process also matters. Buyers should receive information in stages, based on their seriousness and the sensitivity of the information. A screened buyer list, confidentiality agreements, and a secure data room help protect the company while allowing qualified parties to evaluate it properly. Customers and employees should not learn of a possible sale from a buyer’s diligence request.
When several credible IOIs are in hand, the owner can compare not only price but also structure, certainty, cultural fit, and post-closing expectations. That comparison creates the basis for selecting a buyer and negotiating the LOI. It is difficult to negotiate those terms well when only one buyer has been approached or when the process begins after an unsolicited call.
The legal wording of an LOI should be reviewed with transaction counsel. Tax consequences should be discussed with your accountant and tax advisor before terms are finalized, especially where an asset transaction, rollover equity, earnout, or cross-border buyer is involved. These are not items to leave until definitive documents are circulating.
Selling a business you built is not just about accepting the largest number on a page. It is about knowing which number is real, which conditions may change it, and when you are giving up the ability to choose. Before responding to an IOI or signing an LOI, a confidential valuation conversation can help establish the value and deal terms you should be prepared to defend.