What Is an Indication of Interest (IOI) in Finance?

An Indication of Interest (IOI) represents a preliminary, non-binding communication in financial markets, signaling a party’s initial interest in a potential transaction. It gauges potential deal viability before formal negotiations. An IOI allows participants to explore opportunities without creating legal obligations, providing a structured yet flexible framework for initial discussions. This initial expression helps to align expectations and provides a foundation for further engagement in complex financial dealings.

What is an Indication of Interest?

An Indication of Interest (IOI) is a communication in finance, signaling preliminary interest in acquiring a security, asset, or an entire company. It is a soft inquiry, not a firm offer or binding commitment. IOIs are commonly used in initial public offerings (IPOs), mergers and acquisitions (M&A), and large block trades of securities.

This expression of interest is non-binding. For instance, in M&A, an IOI communicates a genuine interest in purchasing a company but does not obligate either party to complete the deal. Financial intermediaries, such as stockbrokers or investment banks, often communicate IOIs on behalf of clients to assess market appetite. This step allows parties to explore potential transactions, offering flexibility to refine or withdraw interest based on further information.

The Purpose of an IOI

IOIs allow parties to “test the waters” in financial markets without incurring legal obligations or significant costs. This preliminary step helps participants gauge interest, assess potential demand or supply for an asset, and understand potential price levels. For example, in an IPO, institutional investors submit IOIs to underwriters, indicating how many shares they might purchase and within what price range, which helps underwriters forecast demand and adjust pricing.

In M&A transactions, an IOI enables a potential buyer to signal serious intent and outline preliminary terms, fostering initial discussions without the pressure of a binding agreement. It acts as a filter, helping sellers identify genuinely interested parties and compare initial proposals, which can lead to a more competitive bidding process and potentially better terms. IOIs also facilitate efficient communication in private or illiquid markets, helping to identify potential counterparties for large or sensitive transactions. This early exchange of information helps align expectations and saves time by filtering unsuitable matches before extensive due diligence.

The IOI Process and Information

The communication of an Indication of Interest can occur through various channels, ranging from verbal discussions to electronic messaging systems or more formal written letters. While the format can vary, the core intent remains consistent: to convey preliminary interest. In M&A, an IOI is often a formally prepared letter submitted by a potential buyer to the seller or their financial advisor.

Despite its non-binding nature, an IOI includes specific details to frame the transaction. These include the name of the security or asset, whether buying or selling, the quantity or size of the transaction, and a target or indicative price range. For instance, in M&A, the price might be expressed as a dollar range (e.g., $10 million to $15 million). Other details might cover the proposed deal structure, an estimated timeline for closing, the buyer’s source of funds, and initial due diligence requirements. This information is high-level and does not encompass exhaustive financial or legal terms, serving primarily to facilitate initial discussions.