An attorney compares IOIs for a client on four dimensions: headline price, the structure that determines cash at close, certainty that the buyer will actually close at that price, and fit with the goals the client set in the valuation conversation. The comparison is a single table the client can read in one sitting, and its purpose is to choose which buyers advance to the second round, not to pick a winner. An IOI is generally nonbinding, although particular provisions can be binding, so the attorney's job is to make sure the client understands that a high number from an uncertain buyer may be worth less than a lower number from one who is more likely to close. [1]
Normalizing the headline
The first column of the comparison is enterprise value, and the first task is to make the numbers comparable. Buyers state value differently. One gives a point estimate, another a range, a third a multiple of an EBITDA figure that may not match the seller's. Some state value on a cash-free, debt-free basis; others are silent. Some assume a normalized level of working capital; others will address it in later documents.
The attorney should restate each indication on a common basis: enterprise value, cash-free and debt-free, with the buyer's EBITDA assumption shown next to the seller's. Where a buyer gives a range, the comparison should show the low end as the number and note the high. The client should not assume the top of a range will be paid without further negotiation and a definitive agreement.
Then adjust for what the buyer has left out. A buyer that is silent on working capital may address it in the LOI or purchase agreement. A buyer that assumes the seller pays transaction expenses from proceeds has reduced the price. The attorney should footnote each of these and, where the amount can be estimated, show the adjusted figure. Purchase agreements commonly define a formula that adds or subtracts items such as working-capital excesses or deficiencies, but the exact definitions and dispute process are contract-specific. [2]
Structure: what the client actually receives at close
The second set of columns breaks the headline into its parts. Cash at close. Seller note, with rate and term. Earnout, with the metric, the period, and the maximum. Rollover equity, as a percentage of the buyer's post-close capital. Escrow or holdback, with amount and duration.
The client should see a single line for each buyer that reads: cash at close, contingent or deferred amounts, and the total. A buyer at $32 million with $24 million in cash and an $8 million earnout is not the same as a buyer at $30 million all cash, and depending on what the client said about earnouts in the valuation conversation, the second may be preferable.
Each deferred element has its own risk. A seller note is a credit decision on the buyer. An earnout is contingent on post-closing performance and on the metric's definition, which the buyer will draft. Rollover is an investment in a fund or a company the client does not control. The attorney should state these risks in plain terms in the comparison memo, and should resist the temptation to assign a discount factor that implies more precision than exists. An earnout is a portion of purchase price payable only if specified post-closing targets are achieved, so it should be presented as contingent consideration rather than as cash at close. [3] “The earnout is contingent on revenue in a business the buyer will run; treat it as upside, not price” is a more useful note than a calculated present value.
Certainty: will this buyer close at this price
The third dimension is the one a client is least equipped to judge and an attorney is best placed to assess from the available record. Certainty has four components.
Funding. Does the buyer have committed capital, or does it need to raise equity or arrange debt. A private equity fund with dry powder may be more certain than an independent sponsor who must find equity after the LOI. A strategic buyer with cash on its balance sheet may be more certain than one that needs a board approval it has not yet obtained. The IOI should say which; if it does not, the attorney asks. A filed IOI can state both its financing status and conditions to closing, illustrating why those details belong in the comparison. [1]
Approvals. Who at the buyer has to say yes, and have they been involved. An IOI signed by a partner who has met the deal team may provide more evidence of internal alignment than one from an associate pending investment committee review.
Diligence scope and timeline. A buyer that proposes a four-week confirmatory diligence period with a defined scope may be signaling that it has done more of its work. A buyer that proposes twelve weeks and an open scope may be signaling that significant work remains, and that the price could move.
Track record. Has this buyer closed deals of this size, and has it closed at the IOI price or retraded. The attorney can ask the buyer for references from sellers it has bought from, subject to the buyer's ability and willingness to provide them.
Each of these goes into the comparison as a short note, and the attorney should give the client an overall judgment for each buyer: high, medium, or low certainty, with the reason.
Fit: the goals from the valuation conversation
The fourth dimension returns to what the client said before launch. If the client wanted the employees to be kept, a private equity add-on that will consolidate operations into a platform scores differently from a family office that will run the company as a standalone. If the client wanted a transition period of six months, a buyer that asks for three years of the owner's time is a mismatch. If the client wanted to roll equity and participate in the next sale, a strategic buyer with no rollover mechanism does not fit, however high its price.
Fit also includes the buyer's conduct during the first round. A buyer that followed the process letter, asked thoughtful questions, and respected the deadline may be more likely to behave similarly in diligence. A buyer that pushed for direct access to the owner or tried to negotiate the NDA for three weeks is giving the attorney information about how the next phase may go.
Presenting the comparison and choosing the second round
The comparison memo is one table and two pages of notes, reviewed with the client in a meeting. The attorney walks through each buyer in the order of adjusted cash at close, states the certainty judgment, and notes the fit. The client reacts, asks questions, and decides.
The decision is which buyers to invite to the second round. Three to five can be a practical range when it preserves competition while keeping the management-meeting schedule workable, but the right number depends on the process and the client's capacity. A buyer at the floor set in the valuation conversation may be out. A buyer above the floor with low certainty may be invited on the condition that it address the certainty question before the management meeting. A buyer with a high number and a poor fit is a judgment call, and it is the client's.
Every buyer that submitted gets a response, including the ones not advancing. The response to those is brief, courteous, and gives no information about the other bids.
One thing to do this week: build the comparison table as a template with the columns above. The next time a client shows you a letter from a buyer, you can put it in the table alone, and the empty columns will show the client what is missing from an offer with no competition.
How Acquivo Pro fits
Acquivo Pro logs each IOI against the buyer that submitted it in the firm's single pipeline, next to the NDA record and the data room access history for that buyer, so the attorney building the comparison has every indication and every buyer's conduct in one place. The valuation the attorney set with the client is there for reference, with each figure traceable to its source. The attorney restates the offers on a common basis, judges certainty and fit, and presents the comparison; the client decides who advances. To walk through a process on a client you have in mind, request a demo through the Contact page.
Key Points
- An attorney compares IOIs for a client on headline price, structure, certainty of closing, and fit with the client's stated goals, in a single table the client can read in one sitting.
- Every IOI should be restated on a cash-free, debt-free basis with the buyer's EBITDA assumption shown next to the seller's before any comparison is made.
- Cash at close, not headline enterprise value, is the figure a seller should compare first, because seller notes, earnouts, and rollover each carry a risk the buyer controls.
- Certainty of closing depends on funding, involved decision-makers, a defined diligence scope, and the buyer's record of closing at the IOI price.
- The purpose of an IOI comparison is to choose buyers for a second round, not to pick a winner from generally nonbinding letters.
Sources and references
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