An indication of interest, or IOI, is a short, non-binding document that tells the other side of a potential deal “we want in.” In mergers and acquisitions, a prospective buyer uses it to propose a preliminary price range and explain how they would pay. In an IPO or other securities offering, an investor uses it to tell the underwriter how many shares they want and at roughly what price. Either way, the IOI does not commit anyone to actually completing the transaction, though it can contain side provisions, like confidentiality, that are individually enforceable.
How an IOI Works
The IOI sits at the very beginning of a deal’s lifecycle. A prospective buyer or investor has reviewed some high-level information about the opportunity and decided it is worth pursuing. The IOI puts that interest on paper with enough specificity to show the other side the bid is real. Think of it as a conversation starter backed by numbers.
The document is almost always non-binding with respect to the underlying deal. Neither the buyer nor the seller is locked into completing a transaction based on what the IOI says. That protects both sides: the buyer can walk away after digging into the details, and the seller can pick a different bidder or cancel the process entirely.
Submitting a credible IOI is how a bidder earns a seat at the next round. In a typical M&A auction, an investment bank distributes a confidential information memorandum to potential buyers who have signed confidentiality agreements. Each interested bidder submits an IOI. The seller’s bank uses those submissions to filter the field. A bid that falls outside a realistic price range gets cut. Bidders whose financing looks shaky do not advance. Those who make it through get access to management presentations and the virtual data room.
What Goes Into an M&A Indication of Interest
An IOI without specifics is functionally useless. The seller’s advisors need enough detail to compare bids, assess credibility, and decide who moves forward. At minimum, a credible IOI addresses four things.
Valuation range. The proposed purchase price, usually expressed as a dollar range or as a multiple of EBITDA (earnings before interest, taxes, depreciation, and amortization). A range of $40 million to $45 million, or 5x to 6x EBITDA, gives the seller something concrete to evaluate. An unsupported number with no methodology behind it carries little weight.
Transaction structure. Whether the buyer proposes a stock purchase (acquiring the target’s shares and assuming existing liabilities) or an asset purchase (selecting specific assets and leaving unwanted liabilities behind). The choice has major tax consequences. In an asset purchase, buyers get a stepped-up tax basis in the acquired assets, increasing future depreciation deductions. In a stock purchase, sellers typically pay capital gains rates on their proceeds regardless of entity structure.
Source of funds. How the buyer intends to pay. A credible IOI specifies whether the consideration is all cash, a mix of cash and equity, or something else, and indicates whether financing is committed or still contingent. Vague language about “exploring financing options” is a red flag that can get a bid tossed.
Proposed timeline. A realistic schedule for completing due diligence, negotiating definitive agreements, and closing. A slow timeline can disqualify an otherwise attractive bid in a competitive process.
Conditions matter as much as price. Every IOI attaches conditions to the proposed deal: satisfactory completion of due diligence, regulatory approvals, execution of definitive agreements. A bid with fewer or less burdensome conditions often wins out over a nominally higher one, because sellers value deal certainty. An acquisition that falls apart six months in costs far more than a slightly lower purchase price.
Some IOIs also request exclusivity, asking the seller to pause negotiations with other bidders during the review. Sellers rarely grant exclusivity at this stage, since the whole point of an auction is competitive pressure, but the request signals a bidder’s seriousness. Most IOIs run only a few pages. The point is to communicate seriousness and financial capacity, not to negotiate the finer points.
IOIs in IPOs and Securities Offerings
In public offerings, the IOI plays a different role. Instead of one buyer courting one seller, an underwriting syndicate collects IOIs from dozens or hundreds of institutional investors to gauge demand for the new shares. This process, called book-building, is how underwriters figure out the right offering price and how many shares to sell.
An investor’s IOI in this context is straightforward: it states the number of shares the investor wants and the price or price range they are willing to pay. The underwriter aggregates all of these to build a demand curve. Strong demand and oversubscription push the final offering price up. Weak IOI volume forces the issuer to lower the price range or postpone the offering altogether.
These IOIs are strictly non-binding. No money changes hands, and no investor is obligated to follow through when shares are finally allocated. Federal securities law defines “offer” broadly, but the regulatory framework prevents any actual commitment from forming before the registration statement becomes effective.
SEC Rule 163B, adopted in 2019, lets issuers and underwriters engage in “test-the-waters” communications with certain large institutional investors, both before and after a registration statement is filed. That means preliminary IOIs can be collected earlier than the traditional timeline would allow. The rule limits these early communications to qualified institutional buyers and institutional accredited investors; a QIB generally must own and invest at least $100 million in securities on a discretionary basis, or $10 million for registered broker-dealers.1U.S. Securities and Exchange Commission. Solicitations of Interest Prior to a Registered Public Offering2eCFR. 17 CFR 230.144A – Private Resales of Securities to Institutions
Even under Rule 163B, these communications are still considered “offers” under Section 2(a)(3) of the Securities Act, meaning they carry potential liability under Section 12(a)(2) for material misstatements or omissions.1U.S. Securities and Exchange Commission. Solicitations of Interest Prior to a Registered Public Offering Non-binding does not mean consequence-free.
Which Parts of an IOI Actually Bind You
An IOI often includes provisions that are individually binding even though the underlying deal terms are not. Confidentiality clauses are the most common, protecting proprietary information the seller shares during the review process. Non-solicitation clauses preventing the buyer from poaching the target company’s employees also show up regularly. These carve-outs need clear language specifying which parts of the IOI are enforceable and which are not.
The non-binding nature of the rest depends entirely on how carefully the document is written. Courts look at the actual language, not the label. If an IOI contains all material deal terms, uses contract-like language (“agree,” “shall,” “commit”), and lacks an explicit statement that the parties are not bound, a court may treat it as enforceable even if everyone involved assumed it was preliminary.
The safer approach is to include clear language stating that material terms remain unresolved and that neither party is legally bound unless and until definitive agreements are signed. Binding carve-outs for confidentiality and exclusivity should be explicitly identified as the only enforceable provisions. Omitting “good faith negotiation” clauses also reduces risk, since courts have found that obligations to negotiate in good faith can create independent liability when one party tries to walk away.
Even a well-drafted IOI can be undermined by the cover letter or email that transmits it. If a signed transmittal note uses definitive language about the deal terms, it can contradict the IOI’s non-binding intent. The entire package matters, not just the document.
IOI vs. Letter of Intent vs. Term Sheet
The IOI is the lowest rung on the ladder of deal documents. It opens the door to due diligence and nothing more. The Letter of Intent and Term Sheet sit further up.
A Letter of Intent (LOI) comes after the seller has narrowed the field to a preferred bidder, effectively ending the competitive auction phase. The LOI is substantially more detailed: it specifies a purchase price (not a range), outlines the deal structure, sets a timeline for negotiating definitive agreements, and addresses business terms like management retention and working capital adjustments. The LOI is still non-binding on the ultimate closing, but it typically contains binding provisions for exclusivity and “no-shop” clauses that prevent the seller from entertaining other offers during a defined period, usually 30 to 60 days. Breaching a binding exclusivity clause can expose the seller to significant financial liability.
A Term Sheet shows up most often in venture capital and complex financing transactions rather than traditional M&A auctions. It is highly detailed, focusing on economic rights (liquidation preferences, anti-dilution protections) and control rights (board composition, veto powers). A Term Sheet effectively locks in the economic framework before lawyers draft the full agreements. In deals where a Term Sheet is used, it often substitutes for or overlaps with the LOI.
The practical sequence in a typical M&A deal: the IOI gets you into the data room, the LOI takes you off the market, and the definitive purchase agreement closes the deal. Each document narrows the remaining uncertainty and raises the cost of walking away.