Understanding LOI (Letter of Intent) Structure

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What is an LOI (Letter of Intent)?

LOI is a document declaring the preliminary commitment of one party to do business with another. 

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 the correct Letter of Intent structure. 

Although there are many Letter of Intent samples on the Internet, we’re focusing on answering the question: what does a LOI for selling an Amazon FBA business include?

Table of сontents:

What is the purpose of a Letter of Intent for business?

The purpose of a Letter of Intent for 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. 

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 legal team in collaboration with the acquisition team. It is the task of the seller to read it through and make sure all the information within it is correct. 

A seller may deny the LOI and come up with a new draft that is sent to the buyer. Ultimately, both sides need to possess clarification about the terms and conditions before signing the LOI – they should be on the same page.

What’s included in an LOI?

An Amazon FBA Letter of Intent acquisition will include the following points: 

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 the 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, and have 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 where 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.

2. Payout

The second thing that a typical LOI would contain is the payout process. The buyer is paid in three ways: upfront cash, stability payment, and earnout payment. In the LOI the buyer must put a deadline for all payments and lay out the steps of each payment together with estimated dates and timeline. A reliable buyer will have a plan on how to position the business after the takeover, to ensure the payments are sent out on time.

3. Due Diligence

An LOI would also include all the steps of the due diligence process. This process is one of the most important steps in Amazon FBA acquisition and every buyer has a checklist to go through. This includes checking all financial statements but also looking into inventory, supply, the selling process, and every single corner of the business. An LOI will also state the length of this process.

4. Non-disclosure agreement

Every LOI contains an NDA – this serves as a protective layer against leaking information and disclosure of confidential documents.

Are LOIs legally binding?

Yes and no. Once signed the LOI locks the seller in a 60 days exclusivity contract while the buyer is checking 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 the buyers spend a lot of time and resources looking into the brand and need to protect themselves.

What happens after the letter of intent?

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 AmazonSeller Central Account and also provide all the 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 then the buyer and the seller sign an official purchase agreement, and the payment and transfer processes can start. 

Benitago is proud to say that we have followed 100% on our LOIs and treat every offer internally as final. Our biggest bind to our LOIs offer is our reputation.

Click on What’s My Business Worth? to find out more!

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