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Understanding LOI (Letter of Intent) Structure

Selling Your Amazon Business

Posted on June 11, 2021
by Benedict Dohmen

An LOI (Letter of Intent) is one of the most important pieces of documentation that both the buyer and the seller will need to sign through the entire handover process. While they may sound like customary non-binding documents, the exact opposite is true.

As a seller, you will need to understand the correct LOI (letter of intent) for business structure.

An Amazon FBA letter of intent should sum up all key information regarding a sale. It should also include other important information, such as terms of payment and control over the business after the sale is initiated.

You should never sign an LOI until you’re absolutely confident that you’ll push through with a sale. Understanding Amazon FBA LOI structure is crucial, so here’s everything you need to know.

What is an LOI (Letter of Intent)?

A Letter of Intent, or LOI, is a document that declares the initial intent of one party to do business with the other. It’s one of the most important documents you’ll sign when you decide to exit as an Amazon FBA seller.

Receiving a Letter of Intent is a big step in an online business sale. Both Amazon FBA sellers and buyers rely on this document as the initial step into negotiating a deal. However, many sellers aren’t sure what to expect from this document, or what the correct Letter of Intent structure is.

A letter of intent typically outlines the most important terms in a mutually beneficial agreement. There are several key things you should look out for, such as:

An announcement detailing the nature of the deal (e.g. whether it’s a joint venture, a merger between two companies, or a strict sale)

A payment structure
A purchase price
Clarification of which parts of the deal still need negotiating
A due diligence timeline
An exclusivity agreement
A list of requests

We’ll go into more detail on these components later. For now, you need to understand how an LOI is structured and why it should be structured correctly.

What’s the purpose of a Letter of Intent for business?

Above anything else, the purpose of a Letter of Intent for a business sale is to outline and structure how two parties will work together towards a mutually beneficial agreement. However, LOIs also state that a deal may not go through if the buyer can’t provide funding, or the seller fails to provide the necessary documents during due diligence.

The document entails everything that should transpire during negotiations up to the moment that the business is officially sold. In cases where an earn-out is implied, it also covers deferred payments and other responsibilities – of both parties – leading up to the full payment of the venture.

Think of it as your guide or handbook. It’s the answer key providing you all the necessary information before a sale pushes through.

Who sends the Letter of Intent?

In Amazon FBA business acquisition, the buyer is the one who prepares and sends the LOI. This document is usually prepared by the buyer’s acquisition and legal teams. It’s then the seller’s job to read through it and make sure that all information within it is correct.

A seller may deny the LOI and come up with a new draft to be sent to the buyer. Ultimately, both sides need to be completely clear on the terms and conditions before signing an Amazon FBA LOI.

That said, a Letter of Intent is typically drafted after a seller provides the buyer with all the necessary information. So before we move forward with what’s included in an LOI, here’s everything you, as the seller, should be prepared to share with your potential buyer:

Information on your Amazon storefront
Monthly P&L (Profit and Loss) statements, ideally from the last 2 years
An initial call or meeting with buyer to discuss the industry, sales, and recent trends
Revenue for each sales channel
Revenue split by SKUs
Reconciliation of SKU COGS
At least 2 years of month-on-month trends reports
Clear classification of costs
Current and forecasted balances in inventory

If you’re doing this alone or need a reference, feel free to search online for a letter of intent sample. Just make sure to have a qualified professional look over the final draft before you go through with a sale.

What’s Included in an LOI?

Finally, your potential buyer has presented you with an Amazon FBA letter of intent. But is it structured correctly? Does it cover everything that needs to be covered?

Here’s what you should look for with a proper Letter of Intent for business sale. If the LOI is missing any of the below, you’ll want to discuss the shortcomings with your buyer.

1. Price

The first thing that an LOI needs to contain is the price of purchase. This price is previously negotiated between the buyer and the seller, and it is based on SDE multiplied by industry standards. Amazon FBA business buyers usually pay 2-4 times the value of SDE. At Benitago we pay on average 4-4.5 times the SDE (Seller’s Discretionary Earnings), backed by our unique Price Match Guarantee.

An important thing to note is that the price listed in the LOI isn’t the final price. The business needs to go through a due diligence process, wherein all financial statements are checked and the SDE is calculated again. If the seller fails to provide the necessary documents or justify the add-backs to the SDE, the buyer can adjust the price.

In the worst-case scenario, you may end up getting less than the initial asking price. Another factor worth considering is that if you are unable to provide necessary documents, the buyer may not push through with the sale at all.

Although uncommon, you might also end up getting more than the initial asking price. This usually happens when you agree upon a deferred payment structure.

2. Payout

The second thing that a typical LOI would contain is the payout process. The buyer is paid in three ways: upfront cash, a stability payment, and an earnout payment.

In the LOI, the buyer must include a deadline for all payments, a layout of the steps of each payment, including estimated dates, and a timeline. A reliable buyer will have planned how to position the business after the takeover, ensuring that the payments are sent out on time.

The important thing to look for here is a concise, clear payment structure. It should discuss how payments are calculated and when they’re due. Otherwise, the agreement may become murky moving forward.

3. Due Diligence Process

The LOI should also include all the steps of the due diligence process. This process is one of the most important steps in Amazon’s FBA acquisition, and every buyer has a checklist to go through.

This includes checking all financial statements and also looking into inventory, supply, the selling process – every single corner of the business. The LOI should also state how long the due diligence process will take.

When going over this section of the Letter of Intent, it’s important to make a note of every document that may be requested. This gives you ample time to prepare and sort through anything that needs to be sorted.

4. Non-Disclosure Agreement

Every LOI contains an NDA, which serves as a protective layer against information leaks and disclosure of confidential documents. This section is designed to protect the seller if the buyer chooses not to push through with the sale.

This section is one of the most important and, as such, you should have your legal team look into it more closely. Since you’re laying all aspects of your business bare for the buyer to comb through, you can’t take any chances.

Generally, an NDA will protect you against buyers using the information they learned from your business to either start their own or share it with others. There are a lot of things that could go wrong when an NDA is ignored, so we suggest you go over it multiple times to make sure every inch of your business is covered.

Are LOIs legally binding?

Yes and no. Once signed, the LOI locks the seller into a 28 to 60-day exclusivity contract while the buyer checks business documents, reports, and processes. This means that the seller isn’t allowed to get into talks with other aggregators or brokers during the due diligence process.

This happens because buyers spend a lot of time and resources looking into the brand and need to protect themselves.

This is why we typically don’t recommend signing a letter of intent if you’re entertaining other offers. Not only will it limit your choices, but it also wastes time and energy for both parties and leads to aggregators not closing LOIs.

What happens after the Letter of Intent is signed?

After the LOI is signed by both parties, the due diligence and payment processes start. The seller is obliged to grant the buyer access to their Amazon Seller Central account and provide all additional documents that the buyer requests. The buyer is obliged to be transparent about the entire process and voice any concerns promptly.

If all goes well during the due diligence process, the buyer and the seller will sign an official purchase agreement, and then the payment and transfer processes can start.

When that’s done, it’s time to pop the champagne and bring out your most expensive wine. You’ve just successfully sold your Amazon FBA business!

Key takeaway

Receiving an LOI is one of the most important steps when selling your Amazon FBA business. The LOI means that a buyer is serious about your business and you can officially start the sale process. However, not understanding what to expect from the LOI can severely harm and decrease the value of your business. This guide is based on our real-life experience of working with Amazon FBA owners, and we’ve listed all the details you should pay attention to.

Benitago has a 100% track record of following up on LOIs and closing the sale in 28 days.

Now it is your turn – do you have a question for the Benitago team? Or maybe you want to start a conversation with like-minded individuals? Feel free to share your thoughts in the comment section below!