The Ins and Outs of a Typical Letter of Intent

3 min read
The Exit
July 26, 2021

The Ins and Outs of a Typical Letter of Intent

3 min read
The Exit
July 26, 2021

The Ins and Outs of a Typical Letter of Intent

3 min read
The Exit
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July 26, 2021

A Letter of Intent (LOI) is one of the most critical documents you need to consider as a Seller if you are looking to exit your Amazon FBA business. An LOI summarizes the key commercial and legal terms on which a buyer, like Elevate Brands, is willing to acquire your business. It is important to know what should be included in a typical LOI and to understand the terms and implications of these documents. As an LOI is a binding agreement, it should not be signed if either party does not have a high conviction to close the transaction.

A Letter of Intent (LOI) is one of the most critical documents you need to consider as a Seller if you are looking to exit your Amazon FBA business. An LOI summarizes the key commercial and legal terms on which a buyer, like Elevate Brands, is willing to acquire your business. It is important to know what should be included in a typical LOI and to understand the terms and implications of these documents. As an LOI is a binding agreement, it should not be signed if either party does not have a high conviction to close the transaction.

What does a Buyer, like Elevate Brands, need to provide a seller an LOI?

If you are looking to sell your Amazon business, you will likely need to sign a LOI with a potential buyer.

Summed up, a Buyer will express their interest in buying your business by making you an offer — and that offer will be subject to meeting certain conditions. The buyer will also want to peek under the hood of your business to make sure that the numbers were accurately represented to them and to ensure that everything is in good working order.

Before a Buyer can present you with an offer, they will need to sharpen their view on your business and this will generally be by getting information on:

  1. Your Amazon storefront;
  2. Monthly Profit and Loss (P&L) statements (ideally for the last 2 years); and
  3. Having an initial call with the Seller to better understand the business and recent trends.

After receiving the above information, a buyer can lodge an LOI fairly quickly. At Elevate Brands, we have launched an LOI within 1.5 hours of discussion with the seller as we understood the category in which the seller operated in. It also helped that they presented their financial statements in a way that was easy for us to understand and analyze. When sharing information with buyers, be sure to highlight the following key metrics:

  1. Revenue per sales channel (i.e. Amazon, Shopify, Etsy etc.)
  2. Revenue split by SKU
  3. SKU COGS reconciliation
  4. Month on month trends for at least 2 years
  5. Clear cost classification, including potential add backs
  6. Current and forecast inventory balances

What are the typical components of an LOI?

An LOI will contain all the commercial and legal information on which a Buyer is willing to acquire a a Seller’s business. Generally, Amazon FBA exit LOIs will include the following details:

  1. Indicative Purchase Price: the purchase price may be quoted as a fixed number or it may be quoted as a multiple of Seller Discretionary Earnings (SDE). This number will still need to be finalized during the Due Diligence (DD) period. If the buyer finds any material problems during the DD period they can renegotiate the purchase price. For example, if an SDE of $500k was presented to the buyer but an extra $100k of expenses were noted relating to the business during the diligence phase, then the purchase price would be adjusted to $400k SDE instead.
  2. Structure of Purchase Price, which typically includes some of the below:
  3. Upfront Payment: The bulk of the payment will be paid upfront on the day of close (roughly 75-85%). Some buyers prefer to defer more of the upfront consideration to an earn-out, as they believe the business will grow exponentially and they want to take a large share in the potential upside.
  4. Stability Payment: A small portion of the payment can be deferred by 1-3 months to secure a smooth and orderly business hand-over. Stability payments can account for factors like successfully transferring inventory or guaranteeing that supplier relationships are still maintained. This clause prevents business disruption and ensures that buyer and seller interests are aligned.
  5. Earn-out / Deferred Consideration: If the seller is acquired by a professional buyer, they will likely deploy a team of experts to overhaul the brand. This can involve changing images, content, branding, advertising campaigns, leveraging its current network, or looking at the challenges the business was facing to prevent these issues in the future. The aim of this might be to double or triple the business over the next 12 months. An earn-out allows the seller to receive a multiple of the future SDE that the business will obtain 12 months after the date of close.
  6. Term Note: A fixed payment is made 12-24 months after the close of the transaction, provided the business continues to operate as normal.
  7. Net Working Capital True-Up: On the day of closing, the buyer will pay the seller for the working capital (Accounts Receivable and Inventory). However, an estimate might have to be made if the exact balance is not known on the day of closing. After closing the transaction, the amount will be finalized and agreed to by both parties, after which a true-up amount will be paid to the seller.
  8. Due Diligence Procedure: This details the timeline and key steps that a buyer will take when digging deeper into the business. Performing diligence can require understanding the supply chain, recalculating the cost price per unit, tying out revenue to bank statements, and holding further discussions with the sellers to better understand the business.
  9. Exclusivity: Once an LOI is signed, the buyer will be under exclusivity. This means that the seller cannot solicit other offers. When a buyer launches an LOI it means they have a strong conviction of buying the business, it is extremely rare, as it poses a reputational risk to the buyer, for a buyer to walk away from an LOI. A buyer will deploy a significant amount of resources during the Due Diligence period. As a result, the LOI is a binding agreement and the seller will not be able to negotiate with other buyers once the process has started.
  10. Request List: Detailing some of the key items that will be needed, such as bank statements, invoice support, and access to Seller Central.

Every deal is unique. What works for one business or seller will not work for another. As a seller, it is important that you are direct and upfront with the buyer about your intentions and what in the deal is important to you. If you let the buyer know what you want out of the transaction and your reasons for selling, they can tailor the LOI to best suit your goals.

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