What Does Expression of Interest (EOI) Mean?
In a nutshell, an expression of interest is an informal declaration that a buyer, whether strategic or financial, would like to purchase a business. The expression of interest will also provide the seller with a range of possible buying prices.
Most investment bankers also require it to include at least an estimate of the time frame in which the transaction can take place. It is thus one of the documents provided by the buyer to the seller in any mergers and acquisitions deal. An expression of interest indicates that the buyer is relatively serious about purchasing the seller's business via a formal offer.
In most cases, the investment banker will request this type of expression as a means of paring down the offers from the entire crowd of buyers into a smaller and more serious group of potential buyers. These buyers would be able to hold up their end of the deal financially and are also at least a reasonably good fit for the seller.
Expressions of interest are similar to letters of intent (LOIs) in some respects, but they are not as formal as the latter type of document. EOIs do not contain the same level of detail that is typically found in an LOI, and they are usually delivered right after the potential buyer has read the confidential information memorandum (CIM). They are delivered before the due diligence process is initiated and the management meetings begin.
Letters of intent are formal in nature but are still not legally binding. They are not issued until at least some of the due diligence has been completed and the buyer has fully vetted the valuation and the terms of the deal being offered.
Expressions of interest are also commonly referred to as indications of interest (IOI).
Divestopedia Explains Expression of Interest (EOI)
An EOI usually begins by devoting some praise to the company that is being offered, and then outlines the buyer's ability and intention of taking the company being bought to a level that has not been previously achieved.
The idea is to reassure the seller that the company in question will be in good hands. The formal contents of an expression of interest are outlined as follows:
- Purchase price - As mentioned in the definition, the EOI will list the amount of money that the buyer is willing to pay upfront on a cash or debt-free basis when the deal is closed. It will also stipulate that the amount of money that is paid will include the valuations and payments of all executive bonuses, employee stock ownership plans (ESOPs) and nonqualified plan benefits. But the EOI will also contain a clause that allows the buyer to rescind the agreement if the buyer so chooses or change the terms of the payment. This is because the EOI is only an expression of interest and is not binding in any way on either party.
- Valuation methodology - The EOI will outline the basis of the valuation and the series of assumptions that the buyer has used to arrive at this valuation. The offer is based on a number of factors, including the seller's future projections. Some of the assumptions that the buyer will make include:
- The historical financial data included in the CIM is accurate and complete.
- The seller's projections are based on a realistic assessment of the business.
- All corporate retirement benefits will be paid by the seller when the deal closes.
- There needs to be enough working capital to allow the company to continue normal daily operations at the time of closing.
- All contracts for facilities, vendors, employees and customers will be transferred to the buyer with no extra payments being made except for what is outlined in the "Purchase Price" section of the EOI.
- Due diligence - The buyer asks the seller for permission to conduct complete and thorough due diligence on the company being sold. It will also list any specific parts of the company that the buyer will investigate especially closely, such as sales and marketing or human resources.
- Transaction structure - This section outlines the nature of the transaction that the buyer proposes to execute. It could be a complete buyout of the company or just the purchase of one of its divisions. It will also disclose the source of funds that the buyer will use to execute the transaction.
- Management retention plan - The buyer will dictate how the company's senior management will be dealt with and what will happen to them.
- Transition and support services - The buyer will list out the specific materials, equipment and manpower that it will need in order to transition the company being bought in an orderly fashion.
- Approvals required - The buyer will tell the seller whose approvals will be needed in order to close the deal, such as the CEO and the Board of Directors.
- Business conduct - The buyer will require the seller to disclose any changes in how everyday business conduct is changed as a result of the sale of the company.
Other conditions such as transaction expenses, confidentiality and a non-binding clause are also usually included. The last paragraph of the EOI will usually thank the seller for their consideration and provide the seller with the buyer's contact details.