The Indication of Interest Means Progress in an M&A Deal

Although an indication of interest isn’t a binding offer for an M&A deal, it’s an important step that shows Buyer is willing to do something. Granted, that “something” is only typing out a page or two of mostly boilerplate text, signing that document, and e-mailing it to the other side, but it’s still action.

Because people often take the path of least resistance, “doing something” means challenging the status quo, so given the choice between risking the wrath of their bosses by trying to break the boss’s stasis (inaction), employees often elect to do nothing. It’s easier that doing something and reduces the chances of getting fired by making an acquisition that fails.

When Buyer does take the time to submit an indication, Buyer is now signaling both his ability and his willingness to break through the chains of stasis. Someday, that may even involve real work, such as getting on an airplane, visiting a site, having meetings, and negotiating the final deal.

The other reason indications are so important is that for most businesspeople, saying you’re going to do something, shaking someone’s hand, or e-mailing an indication invokes the honor system where your word is your bond. You move from the purgatory of stasis into the arena of effort and work. You stir your own psyche into action.

Believe it not, many people in business are unwilling (or unable) to take concrete steps forward and make decisions. These are timewasters. Although not the nominal intent of the document, the indication of interest can help cull the herd of timewasters and pretenders and provide the Seller with a concise group of Buyers willing (on paper, at least) to move forward.

Sellers prefer to get a quick “yes” or “no” answer from prospective Buyers. After contacting Buyer, Seller much prefers to either receive an indication of interest or a quick decline. The worst are the time-wasters who never respond. If you’re a Buyer, have the common courtesy to always close the loop with any prospective Seller by giving a timely “yea” or “ nay” answer.

Sellers want to receive as many indications of interest as possible. The actual number is a function of a few factors:

• The quality of the company/opportunity

  
  



• The thesis in the offering document

  
  



• The quality of Seller’s intermediary (that is, how good a job he does at generating interest)

  
  



• The strength of Seller’s target list

  
  

If a company is solid in all these categories, Seller should receive five to ten indications.

You should get at least five indications. In most processes, that should give Seller enough potential Buyers to successfully close a deal with one. Sellers should not stop soliciting indications after they reach five, of course — the more the merrier!

Some Buyers simply paper the market with indications. As Seller, you want to obtain indications from more than one Buyer before moving on the management meeting phase.

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Source:http://www.dummies.com/how-to/content/the-indication-of-interest-means-progress-in-an-ma.html