Your Indication Of Interest

If you are actively seeking to buy a company , or make a strategic acquisition for your company, you will invariably be in touch with investment bankers and brokers showing you companies tht are available . Once a transaction has made it past your initial screening, what happens next?

Your next step will be a visit to the company including a facility tour and meeting with the management team. But to get to this meeting, the Seller will want to know that they are not wasting their time . They want to know that what you are thinking as an acquirer makes sense. This is where an Indication of Interest (“IOI”) comes in; and, depending on the sophistication of the Seller’s representative, there may be specific items that will need to addressed.

In general , the Indication of Interest will do a couple of things including an introduction of you as the Acquirer of the business , provide a framework around the deal you are willing to pursue , and provide a roadmap to get the transaction to a closing.

Selling a company can be emotional for the Seller, so presenting yourself as the right Buyer is important. Some of the items you might want to cover in the IOI is your relevant experience in the industry and your experience or track record in closing transactions.

Describing the framework for a transaction will of course include price, but your IOI should go deeper. The transaction structure should discuss i) whether the acquisition is for 100% of the business or something less ; ii) what happens to the cash; iii) who is responsible for the debt of the company; iv) what your proposed capital structure is; and v) what your expectations on working capital are.

If you have an expectation that the management team of the target company co-invest in the transaction, you should mention that as well. Likewise, you will want to mention any  stock incentive program you plan to make available for the management team.

The roadmap for getting a transaction closed lays out what needs to be accomplished to get to a closing. Your roadmap should also include your best estimate of the timing required for each step. This expected timing is your best guess – there will always be unexpected factors that will be out of your control.

From 30,000 feet , there are three basic steps:

    •    due diligence;
    •    financing commitments; and
    •    documentation.

With respect to due diligence, it is helpful at this stage to just provide a high-level sense of what the due diligence will entail. This may be as simple as a half a dozen bullet points.

Financing commitments will vary depending on a number of circumstance, including size of financing and the quality of information you provide your financing sources. You may in this section very briefly state your confidence in getting your financing accomplished and why.

The final step is the documentation of the transaction. With documentation there are so many facets to the process that will be out of your control. Think of the timing you set forth as setting expectations – with everyone moving towards a common deadline.

Finally, make sure that it is clear that your Indication of Interest is non-binding, and that the price and structure is contingent on the preliminary information provided.

If your initial meeting goes well and you want to proceed to the next step, the next document is a Letter of Intent, which will be describe in another article.