“A letter of intent (LOI) is a document declaring the preliminary commitment of one party to do business with another. – Investopedia
This non-binding document contains all commercial and legal terms under which an Amazon FBA buyer is willing to acquire your business. It will include important components of the deal such as the transaction structure, purchase price, exclusivity period, and transition period. It is considered one of the most critical documents and it needs to be detailed, on point, and structured. The buyer puts lots of time and effort into preparing these documents and the Amazon FBA seller is obliged to thoroughly read through them, check the details, and make sure everything is clear.
Receiving LOIs is definitely something worth celebrating. However, it’s also important to keep in mind and understand the hidden incentives from a buyer’s perspective. LOIs also play a big part in the portfolio of the buyer because they are the indicators of the value of the buyer, and showcase their dedication to the process.
There are myriad benefits to more signed LOIs – a higher score in the valuation process, a better picture for the investors, a larger portfolio, and a heightened sense of trust.
However, behind the LOI there is a long and detailed process, a lot of effort and time, and a lot of promises.
Most LOIs (Letters Of Intent) come with an exclusivity period provision that prohibits sellers from talking to other buyers for at least a month. This protects Amazon FBA business buyers from Amazon FBA sellers deciding to go with another buyer after a buyer invests time, resources, and money into doing a deal. As a result, once a buyer and seller sign an LOI, there is a high probability of closing. You may think that this exclusivity period provision helps align both sides’ incentives to get a deal done.
However, in a space that’s rapidly evolving and buyers are looking to constantly raise capital at higher valuations, the incentives may be misaligned. Since acquisitions under LOI are “high probability”, investors are giving Amazon FBA buyers credit for the profits of the businesses that are under LOI and buyers are using that to achieve higher valuations. Buyers are thus incentivized to issue LOIs at valuations they know they cannot close just to get valued higher. Sellers are lured in by high valuations into 60 day long processes that don’t end up closing. By then, the Amazon FBA business buyers have raised money and achieved a higher valuation.