An indication of interest, or IOI, is a short written document that tells a seller or an underwriter you want to be part of a deal and roughly on what terms. In mergers and acquisitions, it proposes a preliminary price range and explains how the buyer would pay. In an IPO or similar securities offering, it tells underwriters how many shares an investor wants and at what price, feeding the book-building that sets the final offering price. Either way the IOI carries no legal obligation to complete the transaction, but it can contain side provisions, usually confidentiality and sometimes exclusivity, that are fully enforceable.
What an IOI Does in a Deal
The IOI sits at the very beginning of a deal’s lifecycle. A prospective buyer or investor has reviewed some high-level information and decided the opportunity is worth pursuing. The IOI puts that interest on paper with enough specificity to show the other side the bid is real.
The document is almost always non-binding as to the underlying transaction. Neither party is locked in. The buyer can walk after digging into the details, and the seller can pick a different bidder or cancel the process entirely. That freedom is the whole point of keeping the document preliminary.
At the same time, an IOI often includes provisions that are individually binding even though the deal terms are not. Confidentiality clauses are the most common, protecting the information the seller shares during review. Non-solicitation clauses that prevent the buyer from poaching the target’s employees also appear regularly. These carve-outs need clear language identifying which parts of the document are enforceable and which are not. Sloppy drafting is where problems start.
What a Credible M&A IOI Contains
In a typical M&A auction, an investment bank runs a structured process on the seller’s behalf. The bank prepares a confidential information memorandum, distributes it to bidders who have signed confidentiality agreements, and then collects IOIs. The bank uses them as a filter: bids outside a realistic price range or with shaky financing are cut, and the survivors earn access to management presentations and a virtual data room.
An IOI that lacks specifics is functionally useless. At minimum, a credible one 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 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 for both sides. In an asset purchase the buyer gets a stepped-up tax basis in the acquired assets, increasing future depreciation deductions. In a stock purchase the seller typically pays capital gains rates on the proceeds.
- 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 whether financing is already 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 when the seller wants to close before market conditions shift.
Conditionality matters as much as price. Every IOI attaches conditions: satisfactory diligence, regulatory approvals, execution of definitive agreements. A bid with fewer or less burdensome conditions often wins over a nominally higher one, because sellers value deal certainty. An acquisition that collapses six months in costs far more than a slightly lower purchase price.
Some IOIs include a request for exclusivity, asking the seller to pause talks with other bidders during the review. Sellers rarely grant it at the IOI stage, since the point of an auction is competitive pressure, but the request signals seriousness. Most IOIs run only a few pages. The goal is to communicate seriousness and financial capacity, not to negotiate finer points.
IOIs in IPOs and Other Securities Offerings
In public offerings, the IOI plays a completely 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 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 here states the number of shares wanted and the price or price range they are willing to pay. Strong demand and oversubscription push the final price up. Weak IOI volume forces the issuer to lower the range or postpone the offering.
These IOIs are strictly non-binding. No money changes hands, and no investor is obligated to follow through when shares are finally allocated.
Rule 163B and Who Can Be Approached
Section 5 of the Securities Act of 1933 creates three distinct periods controlling what issuers and underwriters can say and to whom. Before a registration statement is filed, Section 5(c) broadly prohibits offers to sell or buy securities. During the waiting period after filing but before effectiveness, oral offers are permitted but written communications are limited to documents meeting statutory prospectus requirements under Section 5(b). After the SEC declares the registration effective, sales can proceed.
Rule 163B, adopted by the SEC in 2019, carved out an important exception. Any issuer, or a person authorized to act on its behalf including underwriters, can engage in oral or written “test-the-waters” communications with certain large institutional investors both before and after filing, which lets underwriters start collecting preliminary IOIs earlier than the traditional timeline would allow.1U.S. Securities and Exchange Commission. Solicitations of Interest Prior to a Registered Public Offering
The catch: Rule 163B limits these early communications to qualified institutional buyers (QIBs) and institutional accredited investors. A QIB must own and invest at least $100 million in securities on a discretionary basis, or $10 million for registered broker-dealers.2eCFR. 17 CFR 230.144A – Private Resales of Securities to Institutions The rule does not require formal verification, but the issuer must reasonably believe the investor qualifies.1U.S. Securities and Exchange Commission. Solicitations of Interest Prior to a Registered Public Offering Retail investors cannot be solicited through this channel.
Even under Rule 163B, these communications are still considered “offers” under Section 2(a)(3) of the Securities Act and 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 Underwriters who make misleading claims while collecting IOIs can face legal consequences even though the IOIs themselves bind no one.
How an IOI Differs From an LOI and a Term Sheet
The IOI is the lowest rung on the ladder of deal documents. It opens the door to due diligence and nothing more. Knowing where it sits relative to the Letter of Intent (LOI) and the Term Sheet prevents confusion about what each one actually commits you to.
A Letter of Intent comes after the seller has narrowed the field to a preferred bidder, effectively ending the competitive auction phase. The LOI is substantially more detailed than the IOI. It specifies a purchase price rather than a range, outlines the deal structure, sets a timeline for negotiating definitive agreements, and addresses key business terms like management retention and working capital adjustments. The LOI is still non-binding on the ultimate closing, but it typically contains binding 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 such as liquidation preferences and anti-dilution protections, and control rights such as board composition and veto powers. It 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.
When “Non-Binding” Isn’t
The non-binding nature of an IOI depends entirely on how carefully it is written. Courts look at the document’s actual language, not its 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 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, with everything else expressly non-binding. Omitting “good faith negotiation” clauses also reduces risk, because courts have found that obligations to negotiate in good faith can create independent liability when one side tries to walk away.
Even a well-drafted IOI can be undermined by the cover letter or email that transmits it. A signed transmittal letter using definitive language about the deal terms can contradict the IOI’s non-binding intent. The whole package matters, not just the document itself.
Tax Treatment of IOI-Stage Costs
Legal fees, advisory fees, and other professional costs incurred during the IOI phase of an acquisition are not automatically deductible. Federal tax rules require taxpayers to capitalize amounts paid to facilitate acquisitions and certain other listed transactions, regardless of whether the deal ultimately closes.3eCFR. 26 CFR 1.263(a)-5 – Amounts Paid or Incurred to Facilitate an Acquisition That means most deal-related professional costs get added to the basis of the acquired assets rather than deducted in the year incurred.
One exception is worth knowing. Investigatory costs that do not exceed $5,000 in the aggregate qualify as de minimis and need not be capitalized.3eCFR. 26 CFR 1.263(a)-5 – Amounts Paid or Incurred to Facilitate an Acquisition That threshold rarely covers the full cost of preparing and submitting an IOI in any sizable deal, but it can apply to very early-stage investigation expenses.
For success-based fees (advisory fees contingent on closing), a safe harbor under IRS Revenue Procedure 2011-29 allows taxpayers to treat 70 percent of the fee as a non-facilitative expense that can be deducted, while capitalizing only the remaining 30 percent. The election must be made on the tax return for the year the fee is paid, and it is irrevocable.4Internal Revenue Service. Revenue Procedure 2011-29 On large transactions where advisory fees run into the millions, that safe harbor can produce substantial savings compared with capitalizing the full amount.