You’ve worked hard to build your Amazon FBA business but have decided it’s time to ride off into the sunset, or at least move on to your next venture. You’ve identified a suitor and, after some initial meetings, say they’ll be sending you their “LOI”. You’re not sure what an LOI even is, what is normally in there, or what you as a seller r should be on the lookout for. In this post, we cover what an Letter of Intent is, why it’s so important, key things to watch out for, and why understanding what should (and should not) be in it is critical to your chances of a successful sale of your Amazon FBA business.
Ben’s Note: Although I will refer to Amazon FBA throughout this article, the same principles will generally apply to your Walmart seller, eBay account, etc., with minor variations.
What is a “Letter of Intent” anyway?
An LOI is a document which, like it sounds, announces the intention of a party to do business with another party. Receiving an LOI an important step in the sale of your online business–where you go from just talking with an interested buyer to things getting real in a hurry.
While there are no hard and fast rules for what needs to be in an LOI, from my twenty years negotiating and drafting purchase and sale transactions, I can tell you that a solid LOI should contain the key economic or business terms which both buyer and seller have agreed amongst themselves in their initial conversations.
Keep in mind that a true LOI is supposed to be a framework or outline of the deal, not the purchase contract itself. Less seasoned parties are often intimidated by the prospect of an LOI or having to come up with one, mistakenly thinking it has to be legally perfect in all respects. But, as I often tell clients, the LOI could be penned on the back of a cocktail napkin; what matters is that the key business or economic terms are at least somewhat fleshed out by the parties so that they have a strong outline to turn over to their respective counsel to transform into a final (and ideally enforceable) definitive agreement for the two sides to sign (i.e., the purchase agreement).
The point is: a carefully thought-out and well-crafted LOI can set the table for a smooth and successful transaction.
Why not just write up a purchase contract?
Sure, you and the buyer could do this, and for certain simple, straightforward transactions, or ones that don’t involve a ton of money, this would probably make sense. However, the aim of an LOI to outline and basically hash out the key economic and more controversial terms ahead of time and in advance of the time and legal fees spent on a final agreement.
Some people (particularly sellers) will often balk at the idea of having to go through the LOI process, believing it to be unnecessary or (even more nonsensically) rich source of legal fees for us attorneys. Trust me here; without a good LOI to serve as the roadmap of the key economic terms of your deal, your attorneys fees could end up being far higher, since you’re leaving it to the lawyers to guess at what those critical terms should be for their clients and, worse, risking the dreaded “negotiation-by-lawyer” which is never where you want a transaction to go. This even leaves out the increased risk of disputes or even litigation resulting from one side or the other not performing or doing what was expected by the other side since it wasn’t thought through by the parties in advance.
Should the FBA Seller or Buyer prepare the LOI?
There is no rule that it has to be one side or the other to cut the first draft. In my experience, it is the buyer who is making the initial offer and thus is in the best position to know what it is they specifically want and how they would like to get to the purchase of the business. Amazon FBA business acquisitions are no different; the buyer is generally the one who prepares and sends the LOI to the FBA business seller.
More let’s say institutional buyers have acquisition and legal teams that prepare LOIs and have them at the ready. It then becomes your job as the seller (and that of your legal counsel) to review the LOI, fully understand its terms, and make sure it contains the key deal points you actually agreed to in your preliminary discussions.
Which brings me to another bonus of using the LOI. Until both sides sign, the LOI that you are initially sent can always be revised, if necessary, or even rejected outright if it contains things which you never agreed to or are flat-out unacceptable. If the LOI is close to what you agreed to, then you or your legal counsel can markup or, to be really fancy, “redline” the draft LOI and send it back to the buyer for their consideration. At the end of the day, both sides need fully understand and be in agreement on the specific contents before signing an Amazon FBA LOI.
What should an Amazon FBA LOI contain?
Now, on to the fun stuff! So what are some of these key “economic or business terms” that I keep referring to? Although the following is by no means a complete list, it should help get you a good chunk of the way there (not to mention make you your lawyer’s favorite client):
- Purchase Price (and price adjustments!)
Yes, this one is an obvious one and usually the first thing a seller rightfully wants to know. This is as key an economic term as it gets. This is not something that I as your attorney can or should arrive at for you (so please don’t ask us (or at least me)). Price is negotiated between the principals in advance, typically based on a multiple of seller discretionary earnings (“SDE”) from the FBA business.
Keep in mind that the purchase price as listed in the LOI may or may not even be the final figure at closing. When our firm represents FBA buyers, we typically recommend writing in some provision or mechanism for final adjustment of the purchase price (up or down, although depending on the sophistication and bargaining strength, you might be able to negotiate an adjustment in just one direction favorable to you), depending on completion of the due diligence process, specifically seller’s updated financial statements, trend reports, inventory, etc. and the SDE is calculated again.
If you as the seller are not able to provide support for your SDE, and the two sides agree to a price adjustment, you may end up getting less than the initially negotiated purchase price. It is also possible that the buyer may just walk. As mentioned above, if you’ve negotiated and drafted the LOI correctly on this issue, you might be entitled to receive more than the initial purchase price.
- Payment Terms
Typically, the seller of an Amazon FBA is paid in three ways: upfront cash, a stability payment, or an “earn-out”.
As someone who has seen many of these things, the old saying really is true: “cash is king.” Even if you have to defer a portion of the purchase price, you always want to get as much up front as possible. Why? You’d be surprised how often a buyer will suddenly get a case of “buyer’s remorse” or claim that something wasn’t disclosed or totally accurate. All of a sudden, those installment payments start coming in a little slower (if at all). Bottom line: get as much as you can up front, as it could be the only money you’ll ever see.
As the seller, you should be sure your LOI contains hard deadlines or an agreed-upon schedule for all payments. A reliable buyer will have planned how to position the business after the takeover, ensuring that the payments are sent out on time. This section should also be clear on how payments are to be calculated. While these details may seem obvious or implied to you, they may not to the seller, so you shouldn’t assume this and risk future misunderstandings or disagreements that might affect or delay payments owed to you.
Use of experienced legal counsel can help turn the proposed payment arrangement into a well-defined, clear payment structure in the LOI, with your attorney having thought through all of the various contingencies with enforcing the structure.
- Due Diligence Process
Due diligence is one of the most important steps in Amazon’s FBA acquisition, and your buyer will almost certainly have a wish list of DD items for you.
DD items will customarily include financial statements, sales reports and trends, KPIs, examination of inventory, supply, and the selling process.
So as to avoid the never-ending escrow, it is very important that your LOI be written so as to plainly state the scope of due diligence and how long the process will be allowed to take before your buyer must put up or shut up.
- Confidentiality/Non-Disclosure Agreement
Which brings us perfectly to our last “must-have” provision in your Amazon FBA letter of intent. Your LOI should have CNDA language, designed mainly to protect accidental or malicious disclosure of your sensitive Due Diligence material, but also to protect you the seller if the buyer chooses not to go through with the sale, as well as benefitting the buyer by keeping the details of their offer private and out of the public domain.
While the CNDA section may seem straightforward enough, the devil really is in the details. You want to make sure that the seller is completely bound to keep your businesses’ financial and proprietary information under proverbial lock and key and especially whether or not a deal actually gets done.
On the other hand, CNDA language that applies to you that is overly broad or, in certain cases, just plain ridiculous could be setting you up for a potential lawsuit by the other side if a deal fails to close.
Lastly, a well-written CNDA section should prevent against your buyer using the information they learned from due diligence to either start their own FBA business or share proprietary details of it with third-parties or possibly even your competitors.
Are LOIs even binding?
The answer is a very lawyerly “it depends”. In general, most parties understand that the LOI is a non-binding set of principles which will serve as the basis for a final, definitive agreement in the form of a purchase contract (see above).
However, the fine print matters. It is possible to have an LOI which is, on its face, non-binding but yet have the parties agree that certain provisions will actually be enforceable against one another and, oftentimes, even survive the termination or expiration of the LOI itself. Common examples might include CNDA language, exclusivity or “no shop” clauses, going concern or “stand still” provisions, and even things like break-up fees.
More specifically, with respect to Amazon FBA purchases, an LOI will typically bind the seller to an exclusive for a negotiated period while the buyer conducts their due diligence. During that time, the seller is prohibited from communicating with or “shopping” the business to any other aggregators or brokers.
Generally speaking, if you are or planning to entertain multiple offers or are looking for more of an auction-style sale of your Amazon FBA, we advise clients to pass on or politely decline LOIs that contain exclusivity or “no shop” language. Not only is it not cool to do that to your seller, but it might also serve to depress the market for your business, in addition to wasting everyone’s time and resources.
What happens once the LOI gets signed?
After the LOI is signed, the due diligence and payment processes typically start. At a certain point, the buyer or seller give their legal team the green light to begin preparing the purchase agreement with the LOI’s key deal points. The seller will then give buyer access to their Amazon Seller Central account and provide any additional documents that buyer may request. The LOI should make clear that buyer is obliged to be transparent about the entire process and voice any concerns they may have about the business promptly.
If the due diligence process goes according to plan, the buyer and the seller will sign an official purchase agreement, and then the payment and transfer processes can start.
Receiving an LOI for your Amazon FBA business is one of the most important steps when selling your online business. An LOI means that the buyer is serious about your business and is ready to (with apologies to Beyonce) “put a ring on it.”
However, not understanding what to expect from and look for in your final LOI can not only risk decreasing the value received for your business but possibly leave you legally exposed as well. The list and discussion above is not mean to be exhaustive but merely touch on a few of the more fundamental terms what should be contained in your FBA LOI. Other issues, such as deal structure (e.g., asset purchase, stock sale, joint venture, merger), what company assets are actually being sold, non-compete, and post-closing obligations (e.g., holdbacks, seller consulting, etc.) can also be critical to your deal framework.
Ben Bhandhusavee is the Managing Attorney for BHANDLAW, PLLC, a startup, technology, and e-commerce law practice advising founders and management teams on company startup, corporate and technology transactions, e-commerce, as well as Internet privacy concerns. The firm serves corporate and individual clients throughout Arizona, the United States, and internationally. Our offices are conveniently located along the Camelback corridor in Phoenix’s financial district. For more information about our Internet and e-Commerce practice, feel free to reach out using the contact form on the right or call us at (602) 222-5542 to schedule a meeting. Connect with Ben on LinkedIn or Avvo.