How to evaluate indications of interest beyond the headline price

Why the headline number is the wrong place to start

The right way to compare indications of interest is to translate each one into cash the seller receives at close, then discount it for the chance it closes on those terms. A higher range built on an earnout, a seller note or financing still to be arranged can be worth less than a lower all-cash bid from a buyer with committed capital.

First-round letters exist to narrow the field. The process letter tells bidders what to include (see what bidders receive in each round of an M&A process letter), and the scorecard below turns their answers into a short list for the second round, plus a list of points to press each survivor on. It also adds one line most scorecards miss: what each bidder plans to do with the target's systems and historical records after closing.

The IOI checklist

Work through every letter with the same list. Mark any item a bidder left blank; silence is information.

Value and structure

• Enterprise value range stated, with the low end treated as the working number
• Basis confirmed: cash-free, debt-free, with a normalized working capital assumption
• Cash at close separated from rollover equity, earnout, seller note, escrow and holdbacks
• Earnout metric, period and who controls the levers that drive it
• Which earnings figure the value rests on, and which adjustments the bidder accepted
• Treatment of one-time items, including any data license proceeds

Financing certainty

• Equity source named: committed fund, balance sheet or deal-by-deal capital
• Debt sources and leverage assumption stated, with named lender relationships
• No financing condition, or a clear path to removing it
• Record of closing at or near first-round value in prior deals

Diligence and timing

• Scope of diligence: quality of earnings, legal, IT, commercial, environmental
• Outside advisers already engaged or named
• Timeline to LOI and to closing that matches the process letter
• Management time, site visits and customer calls requested

Approvals and conditions

• Internal approvals obtained (investment committee or board) and those still needed
• Third-party consents assumed: key customers, landlords, suppliers, licensors
• Conditions such as management retention or specific representations

People and rollover

• Rollover equity expected from owners and its terms
• Employment and transition terms for the owners and key managers
• Plans for headcount, offices and the brand

Systems, records and data plans

• Stated plans for ERP, CRM, email and file systems after close: keep, migrate or retire
• Expected transition services and their duration
• Position on an existing or planned data license, including its exclusivity and term
• Any plans of the bidder's own for the target's historical records
• Requests for raw system exports or customer-level data before an LOI

A weighted IOI scorecard

Score each bidder from 1 to 5 on each criterion and multiply by the weight. The weights below are Illustrative; set them with the seller before the letters arrive, so the ranking reflects the seller's priorities rather than whichever bid looks best on the day.

Keep the weighted totals and the notes together. The notes become the questions you send each bidder before the second round.

How to use the results

If every letter clusters in the bottom rows, the problem may be the buyer universe rather than the bids, and rebuilding the M&A buyer list by tier is the place to start.

Illustrative: three fictional first-round letters

This example is Illustrative and fully fictional.

• Bidder A, a fictional strategic acquirer, offers the highest range, but a large share of the value sits in a two-year earnout tied to revenue the seller will not control after closing. It plans to retire the target's ERP and file servers within a quarter and asks that no data license be signed before closing.
• Bidder B, a fictional sponsor-backed platform, offers a middle range, mostly cash at close, backed by committed fund equity and a named lender group. It will keep the target's systems for a year under platform IT and has no objection to a pre-close license if it is disclosed.
• Bidder C, a fictional family office, offers the lowest range in all cash with light diligence, keeps all systems, and asks for a long exclusivity period at the LOI stage.

On the weighted scorecard, Bidder B ranks first and Bidder A second once the earnout is discounted. Both advance. Bidder C stays warm as a backup. Because Bidder A objects to a license, the seller decides before round two whether a license matters enough to finish before signing an LOI.

Red flags in a first-round letter

• A range so wide that the low end describes a different deal.
• Value based on adjusted earnings the bidder has not yet seen supported.
• A request for exclusivity at the IOI stage.
• Financing described as to be arranged, with no sources named.
• Requests for raw customer records or full system exports before an LOI.
• Silence on working capital, rollover or the owners' roles.
• Plans for systems or staff that contradict what management was told in meetings.

Where a pre-close data license fits in the comparison

A data license grants a buyer of data specific rights for an agreed term; the company keeps ownership. US copyright law reflects that rights can be split: under 17 U.S.C. 201, ownership may be transferred in whole or in part, and any exclusive right may be transferred and owned separately. An acquirer of the company therefore inherits the business with any license already in place, which is why the systems and records line in the checklist matters.

Bidders' quality-of-earnings teams will also ask how license proceeds are recorded. Deloitte's ASC 606 roadmap on identifying the nature of a license explains that whether a license is a right to use or a right to access intellectual property affects when revenue is recognized. The seller should ask its auditors how a specific license would be treated before bidders raise it.

This is general information, not legal, tax or financial advice. Confirm with your own counsel and auditors before acting.

If a license is already in negotiation, say so in the process letter and the CIM so bidders price it up front; the page on licensing data during a sale or LOI covers the sequencing, and what an LOI no-shop clause restricts explains why the decision belongs before exclusivity. For a first look at whether the seller fits, run the company fit checker; it is a preliminary screen, not an approval.

Advisors who introduce a client to SourceX are paid on the same basis as every partner. Partners earn 25% of the eligible platform fees SourceX actually collects from the referred company's licensing deals, capped at $100,000 per referred company, and rewards become payable only after the buyer pays and SourceX receives its fee. Rewards are not guaranteed and never reduce the client's proceeds; check your engagement letter and disclose the arrangement. Program mechanics for bankers and brokers are on the M&A advisors referral page.

Next step

Add the systems and records line to your next IOI scorecard. If a client has years of operational records and wants to explore a license, register as a partner to make the introduction yourself.