What is a letter of intent (LOI)? - One of the last steps to sell your Amazon business

There may come a point, after you’ve spent money, time and effort building your Amazon business, when you decide it’s probably time to hang up the boots and sell it off. 

This could be for any number of reasons, maybe you just want to move onto something new, or the business has gotten to a point where it needs a serious injection of cash to scale properly and you can’t do it on your own. 

To start the sales process, you first need to find out what your business is worth and what type of buyer you want to sell to. Once you’ve got that figured out, you have to sit down with the counterparty and get down to the brass tacks of the actual sale, but it doesn’t happen all at once, rather in stages. 

One of the final stages, acting as a bridge of sorts between the informal discussions with potential buyers and actually signing on the business away, is the letter of intent (LOI). 

What is it?

The LOI is a non-binding letter that lays down the broad outline of the deal, putting the main terms all in one place so that all parties concerned can move into the formal part of the sale in agreement and on the same page. 

This LOI stage usually takes between 30-60 days and involves the main terms being negotiated, with drafts getting sent back and forth until you can arrive at a formula everyone is happy with. 

The first draft is typically prepared by the buyer’s team, after which the seller can accept it or send back another draft with wanted corrections.

Terms that will typically be part of the LOI include:

• Transaction price: For obvious reasons this is the main stat, the top number underlying everything else. This is determined as a multiple of your seller’s discretionary earnings (SDE), usually landing between 2-4x. Keep in mind that the LOI is non-binding, and the price can change as the negotiations progress, particularly during the due diligence phase when things may come to light that put downward pressure on what the buyer may want to pay for it. It is less common that the price rises from the asking price following due diligence, but it has been known to happen.

• Payment structure: Once you’ve determined how much the deal will be worth, you have to agree how it will be paid. Will it be an all-in-one payment? Will it be staggered with deferred payments over time? Will there be contingency payments or earn-outs down the line based on hitting pre-agreed performance targets? Deadlines for each payment should be outlined at this stage, as well as details on how each instalment is calculated. Clarity here will avoid problems down the line.

• Outline of due diligence phase: Due diligence is one of the most important parts of any takeover process, and a buyer will have a clear checklist of things they will need to see before agreeing to sign a check. Everything is likely to be requested - people parting with a lot of money will not want to leave any stones unturned - so be sure to make a note of all documents that will be requested to you have them ready to show later on.

• Exclusivity and non-disclosure agreements: The buyer will want to make sure that they have a period of time - usually 1-2 months - during which time they can work on the potential deal without having to worry about another competitor stepping in on their purchase, so exclusivity terms will need to be outlined in the LOI. On your end as the seller, you will also need to make sure that if the deal falls through and no purchase is made, the buyer is legally barred from disclosing any sensitive information about your business. 

• Details on which aspects of the deal still need to be negotiated: Not everything is covered under the LOI, even as a framework, so you need to sort out what wrinkles still need ironing out during later negotiations.

• Lists of any other requests from either part: In addition to just being a necessary step in the process, it lays down groundwork that prevents either party from getting blindsided at a later stage of the sale. While the LOI comes before the due diligence process, there are certain things you will need to provide the buyer before the LOI can be drafted, these can include: 

• Monthly P&L statements over a certain period of time, likely the past few years
• Trends reports over a similar time frame as the P&Ls
• Revenue figures, split by revenue stream as well as by SKU
• Current inventory and inventory forecasts
• Cost of goods sold (COGS)
  

After the LOI

Once the LOI is agreed on and signed, you will move on to the due diligence phase, during which time the buyer will look through every corner of the business and run though the checklist outlined in the LOI to make sure there are no nasty surprises and everything is on the level. 

As due diligence is being carried out, buyer and seller will be negotiating the precise and final terms of the deal, ironing out any issues that arose during previous stages, and looking towards drafting a binding agreement. This will usually take around 90 days.

If all checks out during due diligence, then you move onto the closing phase when everything gets signed - typically over 5 days - the payment gets made (or at least the first part of the payment) and the business gets a new owner. 

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