28 April 2022

Letter of Intent (LOI): What to Know When Selling Your FBA Business

Matthew Walker
Matthew Walker
Letter of Intent (LOI): What to Know When Selling Your FBA Business
Read Time: 7 minutes

There is no standardized documentation for the letter of intent (LOI) with regards to acquiring Amazon FBA businesses. 

Each buyer outlines in an LOI to the seller a set of terms and conditions for the deal on offer.  Many of these overlap from buyer to buyer and deal to deal. However, there is no one-size-fits-all document. 

Therefore it is important when you sell your Amazon FBA business to understand the nuances of the LOI on the table. Signing an LOI without proper advice can lead to a lower offer for the FBA owner. 

Note: See study in section 9 of Exit Guide for Amazon FBAs [free download] 

To help FBA owners to better understand the significance of the “Letter of Intent” in the exit process, we hosted a webinar. Over the course of an hour, seven lawyers (divided down buyer and seller lines) discussed the in’s and out’s of the LOI.     

In this post, we will highlight everything you should know before signing an LOI to sell your eCommerce business. 

Are you looking to sell your eCommerce business in 2022, and need to know exactly how much your business is worth? Contact us today for a free valuation – no strings attached. 

Letter of Intent (LOI) | Everything You Need to Know

The Fortia Group is a M&A firm that brings an investment banking approach to selling your FBA business. We host a monthly webinar to help eCommerce entrepreneurs prepare to sell their FBA business. 

Here are the key takeaways from our last webinar “Demystifying LOIs.” 

Sign up for our next webinar here

#1 What is the key goal of signing an LOI?

The primary goal of the LOI is to outline the main terms of the proposed deal. 

This means tackling the big issues so when it comes to negotiating the formal documentation of the transaction, neither party has wasted their time or money. 

Top of the list is agreeing the main commercial terms of the transaction, and how the deal and payment is structured. 

Needless to say, the purchase price is the most important figure. Often a seller will not even begin negotiations if it is not the right number. 

Other terms that should be considered for a smooth and successful transaction are: 

Restrictive covenants 

If the seller has other business interests. These should be outlined so there is no unnecessary conflict between seller and buyer post-close. 

Carve-outs

To better focus on the core business and for a smoother acquisition, certain aspects of the business (eg. intellectual property) might need to be divested. 

Terms of employment/engagement for the seller and their team 

This might be more applicable in a share purchase agreement (SPA) than an asset purchase agreement (APA). This is because buyers in a SPA are taking on the liability of the company (including staff) as well as the assets. 

Terms of any transitional services

If any are not straightforward 

One of the most important terms of the LOI is to outline some basic legal protections for both parties. 

#2 Is a Letter of Intent (LOI) legally binding? 

Yes and no. 

No – in that most of the LOI outlines intentions from the buyer’s side. This helps to (1) manage the expectation of the seller, and (2) assure them that the buyer is the right partner to take over their brand. 

This can include terms like:: 

  • Expected consideration – The offer the buyer is willing to pay if due diligence doesn’t reveal discrepancies that alter the value. It should also include the stability payment and earnout payment.
  • Deal timeline – How quickly the deal will close if no obstacles present like supply chain volatility, trademark issues etc., 

To better understand potential deal obstacles, see Section 5 of the Exit Guide for Amazon FBAs [free download]

All of these terms are conditional. They are not legally binding. That said, reputable buyers understand the potential damage both commercially and reputationally from negotiating in bad faith.  

So what in the letter of intent is legally binding?

#3 What legal protections are included in an LOI?

In short, anything can be stated in contractual terms in an LOI that could incur legal repercussions if breached. 

However, according to the General Counsel for unybrands, buyers look for legal protection on three things in the LOI that sellers should be aware of: 

Exclusivity

A designated period of time where the buyer can exclusively conduct due diligence toward a final consideration. This allows the buyer to focus on preparing their offer knowing the seller isn’t shopping the asset to other buyers. It also ensures no time and money is being wasted on both sides of the transaction.

Covenant of non-compete

Protecting the buyer from a seller launching similar and competing products in the future to the asset just sold.

Confidentiality

In order to prepare an offer, sensitive data needs to be shared. To protect both parties, confidentiality terms will be penned in the LOI.

Note: The terms of exclusivity should be carefully considered and reasonable. Feel free to watch the full webinar here.

#4 What terms need to be outlined in the LOI regarding upfront payment?

Up-front compensation is typically the most important term for both parties. For sellers, it is the only consideration that is guaranteed to be paid; for buyers, the cost represents the greatest risk in the transaction.

Therefore, the LOI should clearly outline terms including:  

  • Quantum of payment: The percentage upfront cash vs. percentage deferred. 
  • The period of time on which that figure is based, i.e. the exact starting point for the trailing twelve months (TTM). This determines the final consideration so it needs to be agreed on at the beginning. 
  • Seller Discretionary Earnings Vs. Earnings Before Interest, Taxes, Depreciation, and Amortization (SDE vs. EBITDA): Which is more useful to calculate an offer and which is applicable to the company structure and deal at hand.
  • Timeline for completed migration: Close vs. Escrow, and how inventory is factored in. 

#5 Should an LOI outline the Earnout payment? 

Yes, in as much as it can. 

The deferred component generally favors the buyer. It is used to de-risk the transaction by withholding payment until certain migration targets are met. 

That said, deferred compensation can be useful as a negotiation tactic when:  

  1. The seller’s price is higher than the buyers are willing to pay 
  2. The seller is more tax sensitive. 

If the asset continues to grow as projected (post-close), this can be  negotiated into the earnout. A term note based on realistic targets can earn the seller another sizable payment 12 to 24 months from close. 

The deferred component can be calculated using a variety of metrics including net revenues, contribution margins, SDE or even a reduction of cost of goods sold (COGS). It is important that the metric used is clearly outlined in the LOI. Otherwise, it can be problematic in due diligence.

#6 What are some of the deferred terms that are sometimes overlooked in the LOI? 

Aside from financial compensation and standard earnout components, one thing that sellers should consider is how they want to participate (if at all) in the brand post-close. This can take on many forms like: 

  • Employment with the buyer
  • Product development compensation
  • Consulting arrangement
  • Referral agreement (aka finder’s fee to refer potential assets)

A post-close partnership between seller and buyer can be factored into the consideration that includes:

  • The opportunity to reinvest sale proceeds in the aggregator
  • Rollover of shares
  • Phantom equity which can be calculated based on the contribution margin of the asset to the aggregator at the point of purchase, when/if that aggregator sells

Emerging trends suggest that aggregators are investing greater resources in operations and growing the brands in their portfolio. As a result, buyers will increasingly negotiate for seasoned entrepreneurs to stay on in some capacity, post-close.  

This should be done at the LOI stage. 

#7 What should sellers do before signing an LOI and starting the acquisition process?

In a recent webinar, lawyers on both sides of the transaction stressed the need for preparing your brand for the sales process. This means, ensuring trademarks are in place, and profit and loss statements are in order for the last 12 months. FBA owners who properly prepare their business attract better offers, and enjoy a smoother business sale. 

Preparation is our mantra at The Fortia Group, and it comes from a famous quote by Benjamin Franklin: 

“Failing to prepare is preparing to fail.” 

In order to help business owners prepare to exit, we offer a number of resources: 

#1 Exit Ready Programme

We work with FBA owners up to two years from an exit to help them prepare their eCommerce brand. Our regimented due diligence process helps the FBA owner know exactly how much their business is worth. Only when the brand is ready do we action our Exit Process and run a professional auction. 

#2 Exit Guide for Amazon FBAs

A free 95 page manual complete with everything you need to successfully exit in 2022. From buyer and seller criteria to legal and financial advice, it’s all in one document.

#3 “Growing Brands through Smart Operations.

An hour long webinar with leading aggregators about best-in-class practices to grow brands. 

Are you considering an exit this year? Join our exit ready programme today for a smoother, more profitable sale of your business. 

#8 How many LOIs should I get before signing one?

In short, as many as you can. 

We did a survey with 32 fulfillment by Amazon (FBA) sellers that exited in the last 18 months. We were surprised to learn how many LOIs each seller got before exiting. 

Almost 40% received only one letter of intent; and more than 70% received less than three offers. 

This means, many Amazon sellers are taking the first offer on the table. 

Note: The last exit we ran achieved 12 LOI (letters of intent), and seven of those buyers upped their bid to try and win the asset. 

Sell Your Ecommerce Business

How The Fortia Group Secures the Best Offer for Your FBA Business?

The Fortia Group differentiates from brokers in two core aspects: Exit Ready Programme and Exit process.

  1. While there are a lot of similarities between online businesses, we provide a personalized approach to selling yours. Our exit team – made up of investment bankers, corporate financiers, and eCommerce experts – combs through your business, getting it ready to present to our trusted network of buyers (>130).  
  2. When your brand is prepared, our team runs a seven step acquisition process to attract the right type of buyer. This begins by circulating a two page teaser with all the relevant numbers and acquisition highlights. Those interested receive a 50 page IM and access to an in-depth data room. This leads to a professional auction. 

Competitive auctions through our trusted network of buyers, always achieves the best valuation for our clients. 

Is 2022 the right time to sell your Amazon FBA? The first step to a successful exit is to schedule a free valuation of your business

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