Private Equity Deal Process & Due Diligence: From IOI to IC
A complete, interview-ready guide to the PE deal process—from Indication of Interest through Investment Committee. Master the diligence workstreams, IOI vs LOI distinction, and IC memo structure that interviewers expect you to know.
Note
Module Reading: This article accompanies the Deal Process & Due Diligence module in our Private Equity interview prep track.
If you're interviewing for private equity, you'll get tested on the deal process in two ways:
- Process clarity: "Walk me through a PE deal from IOI to IC."
- Judgment under uncertainty: "What do you diligence, what can kill a deal, and how do you frame it for Investment Committee?"
This guide gives you a clean end-to-end mental model, the exact diligence workstreams PE teams run, and a practical IC-ready structure you can reuse in interviews.
The 60-Second Walkthrough
This is the answer you should be able to say out loud, without hesitation:
The Backbone Answer
"In a competitive sale, you typically submit an IOI (first-round indication) off limited materials. If shortlisted, you get deeper access—data room plus management—and push workstreams across commercial, financial, legal, tax, and ops to validate the thesis.
You then submit an LOI (more detailed, often with an exclusivity request). Once in exclusivity, you run confirmatory diligence, lock financing and docs, and take the deal to Investment Committee with a memo that's basically: 'Here's the business, here's why we win, here are the risks, here's the return and downside protection, here's what we need to believe.'"
Keep that as your backbone. Everything else in this article is details you layer on top.
The Real Timeline: IOI → IC
Phase 1 — IOI (First Round Bid)
Goal: Get into the shortlist without overcommitting.
What You Typically Have at IOI Stage
| Term | Definition |
|---|---|
| Teaser / CIM-lite | High-level overview of the business and opportunity |
| Basic KPIs | Revenue, EBITDA, growth rates, key metrics |
| Limited Historicals | Usually 2-3 years of summary financials |
| Vendor Materials | Sometimes third-party diligence summaries |
| Banker Q&A | A few questions answered, maybe one call |
Output: An IOI that's high-level and mostly non-binding: price range, basic structure, why you're credible, key assumptions, and what you need to confirm in diligence. The IOI stage helps the seller narrow the buyer pool before giving deeper access.
Phase 2 — Shortlist Diligence (Pre-LOI)
Goal: Decide if you want to push hard and what your angle is.
Typical Pre-LOI Activities
| Term | Definition |
|---|---|
| Data Room Review | Light-to-medium deep dive into available materials |
| Management Presentation | Meet the team, understand the story, ask follow-ups |
| Customer / Expert Calls | Early validation of commercial thesis where possible |
| Initial QoE Direction | Working-capital thinking, debt capacity read |
| Thesis Development | What's your unique angle on value creation? |
Phase 3 — LOI + Exclusivity
Goal: Put real terms on paper and (ideally) win exclusivity.
The LOI is later-stage and typically more specific than IOI: price, structure, timing, conditions, diligence scope, and often an exclusivity period. Some provisions may be legally binding even if price is not.
Senior-Level Insight
"IOI is how you earn the right to diligence; LOI is how you earn exclusivity—and exclusivity is where you pay for certainty."
Phase 4 — Confirmatory Diligence → IC
Goal: Prove your underwriting, quantify risks, and lock execution.
This is where the workload spikes:
Confirmatory Diligence Workload
| Term | Definition |
|---|---|
| Full QoE | Complete quality of earnings + detailed financial model |
| Legal / Tax | Structuring, SPA negotiation support, risk allocation |
| Ops / IT | Synergy validation, systems maturity, cyber posture |
| Financing | Debt terms, commitment letters, credit agreements |
| IC Materials | Memo, slides, recommendation package |
Diligence length varies, but multi-week processes are common—often 4-8 weeks in exclusivity, though complex deals can take longer.
IOI vs LOI: What Interviewers Actually Care About
This is one of the most commonly tested distinctions in PE interviews. Know it cold.
IOI (First Round): "Smart Interest"
What Goes in an IOI
- Valuation range — and how you got comfortable with it
- Structure — asset vs share, rollover equity, earnout (if relevant)
- Key diligence questions — the handful that drive your decision
- Why you / why now — speed, certainty, sector fit, track record
- Process ask — what you need to get to LOI
LOI (Second Round): "Real Proposal"
What Goes in an LOI
- Price and key terms — more concrete than IOI
- Exclusivity request + timeline — typically 4-8 weeks
- Conditions / approvals — financing, IC, regulatory, etc.
- Diligence plan — streams, deliverables, timing
- Financing approach — if leveraged, how you're funding it
IOI vs LOI Comparison
| Aspect | IOI | LOI |
|---|---|---|
| Timing | First round | Second round / final bid |
| Valuation | Range (e.g., $400-450M) | Specific price ($425M) |
| Detail Level | High-level, directional | Detailed, actionable |
| Exclusivity | Rarely requested | Typically requested |
| Binding? | Non-binding | Some provisions may bind |
| Information Access | Limited (teaser, CIM) | Full data room + mgmt |
Due Diligence Workstreams (The PE Way)
PE diligence is not "review everything." It's thesis-driven: validate what makes the deal work and de-risk what can kill it.
Key Mindset Shift
Don't say "we'd just do diligence." Say "we'd run thesis-driven diligence to validate the key assumptions and de-risk the top concerns."
1) Commercial Diligence (Market + Customers + Competition)
Core Question: Is the growth real and durable?
Commercial Diligence Deliverables
| Term | Definition |
|---|---|
| Market Size & Growth | TAM/SAM/SOM, growth drivers, cyclicality exposure |
| Competitive Dynamics | Market structure, differentiation, share trends |
| Customer Analysis | Segmentation, concentration, churn, cohort trends |
| Pricing Power | Ability to raise prices, unit economics stability |
| Channel Risk | Dependency on distributors, platforms, or partners |
Common Deal Killers
- "Growth" that's actually price increases or one-off customers
- Channel risk: one distributor, one platform, one partner
- Customer concentration: top customer >20-25% of revenue
2) Financial Diligence (QoE + WC + Debt-Like Items)
Core Question: Are the earnings real and convertible to cash?
Financial Diligence Deliverables
| Term | Definition | Note |
|---|---|---|
| Quality of Earnings (QoE) | Recurring vs one-off, normalization adjustments | Often determines the real multiple you're paying |
| Net Working Capital | Seasonality, peg implications, cash conversion | |
| Net Debt / Debt-Like Items | Leases, pensions, deferred revenue dynamics | |
| Cash Conversion | FCF vs EBITDA, capex reality, WC swings |
Why QoE Matters
QoE determines what earnings are truly recurring and often changes the real multiple you're paying. Many sell-side processes explicitly revolve around QoE and working-capital mechanics for exactly this reason.
3) Legal Diligence (Risk + Enforceability)
Core Question: What can bite us post-close?
Legal Diligence Deliverables
| Term | Definition |
|---|---|
| Corporate Structure | Ownership, change-of-control clauses, consents needed |
| Material Contracts | Customer agreements, supplier terms, key restrictions |
| IP & Litigation | Patent protection, pending suits, compliance history |
| Regulatory Approvals | Permits, licenses, sector-specific requirements |
| SPA Risk Allocation | Reps/warranties, indemnities, escrows, baskets |
4) Tax Diligence (Structure + Leakage + Exposures)
Core Question: Are we buying a tax bomb—or can we structure smarter?
Tax Diligence Deliverables
| Term | Definition |
|---|---|
| Historic Compliance | Prior audits, open exposures, filing history |
| Optimal Structure | Share vs asset, debt pushdown feasibility |
| Tax Attributes | NOLs, credits, carryforwards and limitations |
| Transfer Pricing | Intercompany arrangements, documentation risk |
5) Ops / IT Diligence (Execution Reality)
Core Question: Can this business scale, and what's the value-creation plan really cost?
Operational Diligence Deliverables
| Term | Definition |
|---|---|
| Operational Bottlenecks | Capacity constraints, supply chain, quality issues |
| Systems Maturity | ERP quality, data integrity, reporting reliability |
| Cybersecurity Posture | Incident history, controls, compliance gaps |
| Post-Close Investment | Required capex, tech roadmap, integration costs |
6) ESG Diligence (Increasingly Standard)
Core Question: Any ESG issues that become value, cost, or reputational risk?
Many GPs now use structured questionnaires and checklists for ESG diligence. This covers environmental compliance, labor practices, governance controls, and sustainability metrics that can affect exit multiples or LP requirements.
How PE Deal Teams Actually Run Diligence
If you want to sound like someone who's done deals, explain it like this:
The Operating System
- Start with the underwriting thesis — 3-5 bullets max on why this deal works
- Turn thesis into diligence questions — the "what must be true?" list
- Assign each question — to a workstream, owner, and deadline
- Run weekly steerco — with advisors: findings, red flags, decisions needed
- Maintain a red-flag log — impact, probability, mitigation, owner
- Update the model continuously — don't "wait for final QoE" to think
This is how you move from "lots of documents" to decision-grade conviction.
What Investment Committee Wants
IC is not impressed by volume. IC wants clarity:
What IC Needs to See
| Term | Definition |
|---|---|
| Why This Deal | Your edge + thesis (what makes this special for you) |
| What Can Go Wrong | Top 5 risks, not 25 minor ones |
| What You Do About It | Mitigants + structural protections for each key risk |
| Returns vs Downside | Sensitivities, not just base case optimism |
| Execution Plan | Who does what post-close, 100-day plan |
A Practical IC Memo Structure
Use this as your "table of contents" answer when asked about IC memos:
IC Memo Structure (10 Sections)
- Executive Summary — Recommendation + headline numbers
- Deal Terms — Price, structure, exclusivity status, conditions
- Business Overview — What it does, where profits come from
- Market & Competition — Growth + moat + positioning
- Investment Thesis — 3 bullets on why this works
- Value Creation Plan — 4-6 initiatives, quantified
- Financials & Returns — Base + upside + downside, key sensitivities
- Key Risks & Mitigants — Top 5, with specific responses
- Diligence Status — What's done, pending, open issues
- Ask of IC — Approve to sign? Continue? Specific conditions?
Interview Impact
If you can recite this structure cleanly, you will sound extremely prepared—like someone who's actually sat in IC meetings.
The Red Flags Interviewers Love
Memorize a tight set and tie each to how you'd detect it:
Top 7 Deal-Killers + Detection Methods
| Term | Definition |
|---|---|
| Customer Concentration | Top 10 customers, contract terms, renewal history, churn |
| Low Cash Conversion | WC build, capex reality, margin add-backs, FCF/EBITDA ratio |
| One-Off Earnings | QoE adjustments, seasonality patterns, backlog quality |
| Key-Person Dependency | Org depth, succession planning, incentive alignment |
| Contract Cliffs | Renewal timing, change-of-control clauses, customer optionality |
| Regulatory Fragility | Licensing requirements, compliance history, pending changes |
| IT / Data Weakness | Reporting integrity, cyber incidents, system technical debt |
What YOU Do as Analyst/Associate
Interviewers often want to see if you understand the job, not just theory.
In IOI Phase
- Build the first-pass LBO (quick base case)
- Pressure test entry multiple vs leverage vs EBITDA growth
- Draft IOI bullets (price rationale, assumptions, diligence asks)
In Diligence / LOI Phase
- Own the data room tracker and Q&A log
- Convert diligence findings into model updates (not just notes)
- Summarize stream outputs into IC-ready bullets
- Draft slides/memo sections: market, risks, value creation, returns bridge
In IC Prep
- Build sensitivity tables: margin, growth, multiple, leverage, WC
- Write the "top risks & mitigants" section
- Make sure the memo answers: "Why will we make money, and what could stop it?"
Common Interview Mistakes to Avoid
Don't Do These
- Confusing IOI and LOI — or treating both as the same thing
- Listing diligence streams without the "why" — always state the decision question each stream answers
- Talking only upside — ignoring downside / protections kills your credibility
- Saying "we'd just do diligence" — instead of thesis-driven diligence with specific focus areas
- Not mentioning QoE + working capital — these are central to financial diligence
Interview Questions + Model Answers
Quick Checklist: IOI → IC
The Cheat Sheet to Memorize
At IOI:
- Price range + rationale
- 3 thesis bullets
- 5 diligence questions that matter
- Credibility + timeline
At LOI:
- Price + structure + conditions
- Exclusivity request
- Diligence plan + timing
- Financing approach
At IC:
- Thesis + value creation plan
- Base/upside/downside + sensitivities
- Top 5 risks + mitigants
- Open items + decision ask
Frequently Asked Questions
Key Takeaways
Key Takeaway
- Know the four phases cold: IOI → Shortlist Diligence → LOI → Confirmatory Diligence/IC
- IOI vs LOI: IOI is earlier, high-level, non-binding; LOI is later, specific, partially binding, with exclusivity
- 6 diligence workstreams: Commercial, Financial/QoE, Legal, Tax, Ops/IT, ESG
- Diligence is thesis-driven: Validate what makes the deal work, de-risk what can kill it
- IC wants clarity: Why we win, what can go wrong, how we mitigate, downside survivability
- Know the red flags: Customer concentration, cash conversion, earnings quality, key-person, contracts
- Understand your role: Model updates, data room tracking, memo sections, sensitivity tables
Understanding the PE deal process isn't just helpful—it's expected. Interviewers want to see that you know what happens at each stage, who's involved, and how decisions get made from the first teaser to the final IC presentation.
Reading helps you understand the process. Interviews test whether you can apply it under pressure, with clean wording and good judgment.