What Is a Letter of Intent, and Do You Need One When Selling Your FBA Business?
Amazon is perhaps the most competitive e-commerce market out there. If you’ve successfully managed to build and grow your Amazon FBA business, you should be proud. The next step might be to sell your Amazon business and move on to a new venture.
To do that, you should appraise your store and search for ambitious entrepreneurs or seasoned investors wanting to take over your business. Remember that most prospective buyers will send a letter of intent for the Amazon FBA businesses they’re interested in. So, once you start marketing your FBA store, expect to receive one.
In this guide, we’ll discuss everything you need to know about this letter of intent — LOI, in short — to ensure a successful sale of your Amazon FBA business.
What is a Letter of Intent to Sell?
A letter of intent to sell is a document that outlines the main terms and conditions of a proposed deal. It’s a preliminary agreement between a buyer and seller regarding the sale of a business in the near future.
This document protects the interests of both parties involved in a transaction as they negotiate formal documentation and navigate through the nuances of the sale process. An LOI precedes the final contract.
Is a Letter of Intent the Same as a Purchase Agreement?
No. People often confuse a Letter of Intent with a purchase agreement, but the two are not the same. Many sellers question, “Why not just straight write up a purchase contract?”
The answer is simple: A LOI is not legally binding. It’s drawn up when two parties haven’t worked out all the contract details.
An LOI only serves as a starting point between two parties looking to negotiate a definitive purchase agreement.
Why a Letter of Intent Is Important When Selling an FBA Business
An LOI allows you to set business terms without entering a legally binding agreement. Receiving an LOI means you go from simply talking with a potential buyer to discussing the terms and conditions of selling your FBA business.
From determining which party will cover the accounting and investigatory costs to specifying the timeline for closing the deal and payment terms, an LOI discusses critical aspects of the due diligence process that eventually lead to the signing of a purchase order.
An LOI serves as a framework of the deal, so the buyer and FBA seller involved in a transaction have a solid baseline to turn over to their legal counsel. In simple terms, an LOI brings potential buyers and FBA sellers on common grounds and eliminates the risk of disputes and instances of miscommunication.
Is a letter of intent necessary?
An LOI is perhaps the most important non-binding document you’ll sign when selling your Amazon FBA business. It outlines how buyer and seller will work together toward a mutually beneficial agreement.
Who writes a letter of intent, a buyer or seller?
Usually, a buyer drafts a letter of intent for Amazon FBA business acquisitions and sends it to the seller.
Though there’s no rule specifying who should draft the LOI, buyers are usually better informed about the expectations and goals of acquiring an Amazon business. Therefore, in a better position to prepare an LOI.
Institutional buyers better understand the deal points that should be a part of LOI and the experience to go with it. As per the preliminary discussions, they can quickly draft an LOI and speed up the negotiation process.
Do You Negotiate Before or After LOI?
A good practice is to negotiate before preparing an LOI. A well-drafted LOI encapsulates all the necessary conditions and terms of the acquisition deal.
That being said, it’s normal if both parties agree to leave specific topics out to be negotiated later on.
Ideally, it should reflect the true intentions of both parties involved in the transaction. In many instances, buyer and seller add a clause that both parties are to negotiate an Amazon FBA deal in good faith.
What is included in a letter of intent to sell?
There’s no standardized Letter of Intent template for deals about Amazon FBA businesses. However, some essential and common business terms that are usually part of this document include:
- Purchase Price: The most important consideration when drafting an LOI. A buyer and seller must be on the same page when evaluating Amazon FBA businesses to negotiate the deal further.
- Payment Terms: In addition to the purchase price, a typical LOI specifies the agreed-upon payment schedule per prior negotiations.
- Due Diligence Process: Most Amazon FBA acquirers have a due diligence checklist for authentication, investigation, and verification of the seller’s central account that becomes a part of the LOI.
Additionally, an LOI includes the following general information:
- The names and addresses of all involved parties
- The fundamental details of the deal
- The closing date for signing a legally binding agreement
Does a Letter of Intent Include the Purchase Price of the Amazon Business?
Yes. A letter of intent includes the purchase price. However, the price mentioned in the LOI may differ from the closing figure, subject to final adjustments.
In Amazon FBA business deals, buyers can pay sellers in multiple ways, including upfront cash, a stability payment, and an earn-out. An LOI may propose the mode of payment, along with the payment schedule.
How Long Is a Letter of Intent to Sell?
Usually, a letter of intent to sell comprises one to two pages and is 500 to 1,000 words long. The document isn’t lengthy because the goal is simply to summarize a deal’s initial terms.
If a buyer and seller decide to move forward with the arrangement, they can list more complete, detailed terms and conditions in the final contract.
Does the Letter of Intent Need to Be Signed?
Yes. The LOI is signed by both parties involved in the transaction.
In the context of the Amazon FBA acquisition, after signing an LOI, the seller must provide the buyer access to their Amazon Seller account and any relevant documentation to start the due diligence process.
Who Signs an LOI First, Buyer or Seller?
The party who prepares the LOI signs the document first. As mentioned previously, an LOI is typically drafted by buyers interested in purchasing a business, so they sign the document first.
Is a Letter of Intent Legally Binding?
A Letter of Intent is not legally binding but indicates serious intent from both parties. It’s essentially an agreement to transition from a casual discussion to a serious negotiation.
Despite the non-binding nature of an LOI, both parties can mutually agree to be bound by specific provisions, e.g., exclusivity, confidentiality, payment terms, etc.
For example, when it comes to Amazon FBA purchases, an LOI may prohibit the seller from communicating with other aggregators and brokers.
Can a Letter of Intent to Sell Expire?
Yes. Like any business document, an LOI cannot be left open-ended, so expiration date is added, after which the terms and conditions listed in the document are no longer applicable.
What Happens After an LOI Is Accepted?
Once the due diligence process is complete and the buyer and FBA seller want to proceed with the deal, both parties sign an official purchase agreement (legally enforceable). Then the business transfer and payment processes can begin.
3 Letter of Intent Mistakes to Avoid
While a letter of intent is a non-binding document, here are some mistakes to avoid when signing an LOI:
- Signing an LOI with the very first buyer: It’s recommended that you do your homework. Talk to multiple buyers before deciding to sell your Amazon FBA business. This will help you pick the most suitable buyer and get the maximum return for your business.
- Agreeing on a long exclusivity period: An exclusivity agreement is one of the main terms of an LOI. For Amazon FBA acquisitions, 45-60 days is sufficient for buyers to inspect an Amazon business. So, avoid signing a more extended exclusivity period, as it can prevent you from reaching out to and dealing with other prospects.
- Approving a vague information access request: While it’s necessary to share relevant information about your business with a prospective buyer, an LOI must specify the type and extent of information to be shared to protect your confidential data, such as a customer list.
Need Help Drafting a Letter of Intent to Sell for Your Amazon Store?
If you want to draft a letter of intent to sell for your Amazon store, we’re here to help. At Dragonflip, we’ve got a team of professionals who help clients draft an LOI to maximize their Amazon FBA business’s value and get the best deal terms. Book a no-obligation consultation call with one of our experts today!