Downsides of gap between initial indication and second bid

October 13, 2023

by a searcher from University of Pennsylvania - The Wharton School in 110 Horatio St, New York, NY 10014, USA

Hi all - I’m looking at a business that wants an initial indication of interest before spending more time, providing more detail, etc. What are the downsides of submitting an initial indication of interest that’s meaningfully different than a letter of intent in terms of valuation (should the input sway our opinion at all)?

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Reply by a searcher
from University of Richmond in New York, NY, USA

It can be frustrating being asked to provide an IOI on incomplete information, but it's not that uncommon. If you are unsure where you will land with the additional information, I would suggest expressing your valuation as a range of adjusted EBITDA multiples and clearly articulating what would cause your LOI valuation to come in at the higher or lower end of the range based on the incremental information you uncover during your pre-LOI diligence. That way, if your diligence uncovers information that would push your valuation to the lower end, you can point to the contingencies in your IOI as an explanation.

Something along the lines of “Based upon the preliminary information relating to [TargetCo] that has been provided to us by [Advisor], consideration for the [Seller] will be based on a total enterprise value of between $6.0 million and $8.0 million, equal to a valuation multiple of approximately 6.0x–8.0x Adjusted EBITDA of $1.0 million (including the elimination of certain owner-related and other non-continuing expenses) for the twelve months ending December 31, 2022.” Then list your contingencies.

Reply by a searcher
from Babson College in Syracuse, NY, USA

I agree with Shane, as long as they’re willing to give you some financial data, i.e. a couple years of balance sheets and income statements, redacted top 10 customers and their sales for the last couple of years, aging reports, etc. I did find sellers that aren’t willing to give you a full or close to full look at the business are either looking for a free valuation or aren’t really committed to selling. The four deals I went to the LOI stage with all gave me whatever I wanted for information and a couple went way beyond what I expected, i.e. access to key employees, introductions to suppliers, etc.

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