Quick Answer
The buy-side bidding process runs in two formal steps. Step 1 is the Indication of Interest (IOI): non-binding, expresses a valuation range with a brief rationale. Step 2 is the Letter of Intent (LOI): a point purchase price, deal structure, an exclusivity period of typically 60 to 90 days, and a partially binding framework (price is usually non-binding; exclusivity, break fees, and confidentiality are typically binding).
Preliminary bid development is the moment all the prior workstreams converge: valuation outputs, capability assessment, tax design, anti-takeover diagnosis, competing-buyer view, and financing readiness all feed into the IOI.
The Two-Step Bidding Process
| Stage | Document | Binding? | Typical Content |
|---|---|---|---|
| Step 1 | Indication of Interest (IOI) | Non-binding | Valuation range (not a point), brief rationale, basic conditions, high-level structure (cash versus stock, financing source), 1 to 2 pages |
| Step 2 | Letter of Intent (LOI) | Partially binding (exclusivity, break fees, confidentiality typically binding; price typically non-binding) | Point purchase price, structure, conditions, exclusivity period (typically 60 to 90 days), expected timeline, definitive-agreement scope |
The two-step structure lets the seller narrow the field at the IOI stage, then negotiate seriously with a smaller set of bidders during the LOI stage.
Exam Tip: Gotchas
- IOI is a RANGE; LOI is a POINT. The IOI gives a valuation range so the seller can sort bidders by aggressiveness without locking the buyer into a number. The LOI commits to a single purchase-price number (subject to working-capital and other adjustments).
- An LOI is "partially binding," not "non-binding." The price provision is usually non-binding (it can move during definitive-agreement negotiation), but the exclusivity, break-fee, confidentiality, and expense provisions ARE typically binding from signing. Treating the LOI as fully non-binding is a common buy-side mistake.
Preliminary Bid Development Workflow
The banker's preliminary-bid workflow brings together every prior workstream.
- Bring together valuation outputs: trading comps, precedent transactions, DCF, LBO; consolidate into a football-field chart with sensitivity ranges
- Layer in capability assessment: strategy, resources, and financial-capacity diagnostics confirm what the acquirer can credibly bid
- Apply tax-structure design: stock versus cash; tax-free reorganization election; stepped-up-basis election where target eligibility allows
- Reflect competing-buyer view: lead-bid aggressiveness versus matching the median bid; preempt versus participate strategy
- Draft the IOI: valuation range, structural terms, and conditions
- Internal sign-off: deal team, capital committee, board approval where required
Contacting the Seller / Liaison Role
The buy-side banker becomes the principal communication channel with the seller and the seller's advisors during the bidding process.
- Channel of communication: the banker manages the flow of diligence requests, scheduling, and process questions
- Insulates principals: keeps the acquirer's CEO and CFO out of direct negotiation early, which preserves negotiating room and avoids inadvertent commitments
- Process management: tracks the seller's process letter, timeline, and management-meeting calendar
- Counterpart relationship: the buy-side banker's regular counterpart is the seller's sell-side banker, not the seller's CEO directly
Think of it this way: the buy-side banker is the buffer between the acquirer's principals and the seller's process. The buffer lets the principals stay in their "should we keep going?" decision role while the banker handles the day-to-day process.
Exam Tip: Gotchas
- The buy-side banker is the FORMAL channel of communication to the seller. Informal back-channels between principals can leak information, blow exclusivity provisions, or create disclosure issues. The banker's process-management role is procedural, not just administrative.