Your business is ready for sale...
Say you’re new to selling your business, choosing to be represented by brokers/advisors for the transaction can be one of the options for running a sale process. But if you're looking to save some bucks in the process of exiting your business, we're here to help.
A typical sale process for Amazon business looks like:-
- Setting up data room for historical financial, operational and legal record - imagine cleaning up your flat to be viewed by prospective buyers visit, extremely important
- Buyer-seller introductory call and Q&A - before inviting prospective buyers to your humble abode for viewing, you send them still and or moving pictures of it - this is the teaser you shoot across to them before they schedule a meeting with you, followed by a bunch of questions related to your flat not asked during the visit due to time constraints, some buyers need to take it back to their fellow decision makers to discuss with (these are the investment decision committee of business buyers)
- Request for a letter of intent/interest (LOI). Non-binding LOI usually provides both parties opportunity to walk away from the deal, and usually is non-commital, while the binding LOI usually gets offered to you once buyer’s due diligence team clears the risk assessment of acquiring your business. More often than not, terms agreed in non-binding offers get completely revised, due to negative/positive findings during due diligence. This means, bids you expect from interested buyers with terms put in offers which you could shuffle and assess. Depending on the attractiveness of your flat from economic perspective and other considerations that matter to buyers, usually offers lapse within a communicated timeline
- Negotiation & Documentation
If taxes and death are the only certainty in life, negotiation is the inevitable in deal-making.
This article focuses on the why is it important for a seller like you to know key deal terms of LOI:
- Get the best terms
- Not to fall for buyer tricks
- Increase the likelihood of completion
Let’s dive in:
Transaction structure: Asset Purchase Agreement (APA) or Share Purchase Agreement (SPA). The main difference between APA and SPA is that in APA, only assets are purchased, and they are itemised clearly in the Definitive Agreement. This link follows a detailed explanation between the two structures. At Rainforest, an APA is most commonly used.
Purchase consideration with material assumptions detailed. A purchase consideration consists of economic terms, namely, the valuation of your business. Material assumptions include, growth projected by sellers on your brand, especially when there’s an Earn-out portion, having a period defined Trailing twelve month (TTM) base for your multiple.
Say your business is worth 3.0x on SDE of $3.0Mn, buyers usually base it on a period expressly defined. A 3.0x SDE offer received in mid-July 2022 based on TTM through June 2022 will have its business 'diligenc-ed' from July 2021 - June 2022.
- Upfront payment, your business’s worth
- Delayed payment, this caters to a slightly complex business structure. Say you run multiple seller accounts for 1 brand you own (which is against Amazon policy on Multiple Selling Accounts), you will be required to close such accounts for a deal to happen. At Rainforest, we will hold this delayed payment until such accounts are shut, and disburse the amount to you after.
- Stability payment, usually paid to you if bottom line of Year 1 post acquisition outperforms the TTM bottom line
- Earn-out payment, this will be a portion which you will be entitled should you stay in the business for an agreed period, usually 18 months and if business grows above a certain level to be mutually agreed by you and the buyer
- Inventory payment, at cost
Conditions Precedent: This clause lays out a list of conditions to be fulfilled in order to complete an acquisition
Timeline and Exclusivity: Details the project schedule from negotiation of LOI, due diligence exercise period, negotiation of definitive agreements, and migration of assets and closing/completion date. This allows both the seller and buyer to work towards the timeline set out as preferred by seller under exclusivity
Governing law and jurisdiction: The law and jurisdiction of which the definitive agreement is governed by. Usually, this is negotiated/agreed upon at LOI stage to ensure most terms are ironed out and agreed on prior to definitive agreement stage, effectively saving time.
And other terms in Definitive Agreement (DA) (post LOI) which you will need to hire legal counsel for:-
- In DA, perhaps the most important clause is Representations and Warranties, after the purchase consideration, conditions precedent, covenants, indemnifications
- Representations and Warranties: this section provides that all statements that the buyer and seller are signing off are true
- Indemnifications: this details all compensations/security against liabilities for any costs that may arise post transaction closing as a result of events that have occurred prior to closing
- Tax matters: any taxes relating to the business and the assets have been paid and concluded
How can buyers take advantage of you?
If you’re inclined to skip through this article, you’re likely to be a victim of buyers with intention to close quick. These buyers tend to:
- Overbid to secure the deal and renegotiate the above terms in definitive agreement
- Push the tough conversations towards definitive agreement stage
What you can expect from Rainforest:
- Simple and straightforward LOI. We always have terms and operational concerns ironed out internally prior to putting them in LOI, unless due diligence team uncovers an absolute deal breaker, we almost never change terms in LOI
- 45 day exclusive period for due diligence
- Strong deal team to project manage your end-to-end sale process to ensure a successful closing with flexibility of deal terms
If you're interested in exploring a sale of your business, reach out to us to have a chat and let us help you!