After the parties have settled their key pricing and commercial negotiations and wrapped up those terms in the form of a term sheet (a.k.a. heads of terms or letter of intent (LOI)), the buyer and its counsel will prepare an asset purchase agreement (APA) or a share purchase agreement (SPA) for the transaction.
The SPA is the main contract entered into between the buyer and seller relating to the sale and purchase of the shares in the target company that owns the Amazon FBA business. The main purposes of the SPA include:
- Documenting the terms of the transaction
- Specifying any conditions that the transaction is subject to
- Apportioning risk between the buyer and the seller
- Protecting the buyer against post-closing competition from the seller
A well drafted SPA for an Amazon FBA deal should be relatively short. It should be specific, reasonable, and proportionate – considering the position of both the buyer and the seller. That being said, the terms of an SPA will almost always give rise to some form of negotiation. The key areas of an SPA that are typically discussed at greater length between the parties are as follows:
- Pricing Adjustments
A significant part of the value that the seller receives on an Amazon FBA deal can often take the form of the upside of the target company’s balance sheet. This almost always gets added on top of the purchase price (i.e. typically the sum of the target company’s net cash, landed cost of inventory and any receivable owed by Amazon up to a specified date). Whilst the broad terms of the balance sheet adjustment are typically dealt with in the term sheet, the parties often ‘go into the weeds’ with this in the SPA. Discussions often include the make-up of the closing balance sheet, the basis on which it’s prepared, and the timing of any balancing payment.
- Earnout
The detail of an earnout is often discussed at length between the parties – pre and post signing of the term sheet. With regards to the SPA, discussions largely centre around the calculation of SDE/EBITDA for the earnout period (where the earnout is based on profit) and the extent of post-closing restrictions on the buyer during the earnout period.
- Set-off And Escrow
Set-off is where a buyer has a claim against a seller, and the seller’s entitlement to any future payments from the buyer is reduced or extinguished by the amount of the buyer’s claim. Although set-off is a customary right that is afforded to a buyer, the rights and restrictions around this can vary and different aggregators approach this in different ways. The key is to find a balance that works for both parties. Escrows for amounts being held back are not commonly used in UK Amazon FBA deals, as the set-up costs are high, and they are not as easy to administer relative to escrow accounts in the US. Where they are used though, their terms are also something that are closely looked at and discussed between the parties.
- Warranties, Indemnities And Limitations of Liability
Another key area of negotiation in an Amazon FBA SPA are terms relating to risk allocation. These terms mainly consist of warranties, indemnities and the limitations on the seller’s liability. Warranties are assurances about the target company or the Amazon FBA business given by a seller to the buyer in the SPA. Indemnities are promises given by a seller to reimburse a buyer in respect of specific risks or liabilities. A breach of a warranty or indemnity by a seller could give rise to a claim. For that reason, it is customary for a seller to have limitations on his/her liability and the extent of those limitations – and indeed the warranties and indemnities – are a key discussion point between the parties.
- Restrictive Covenants
Post-closing restrictions on sellers are a feature of virtually all M&A deals. The extent of these restrictions for Amazon FBA deals though are much more relaxed, as aggregators tend to recognize that sellers often have other brands or other businesses they want to continue running or start-up on the marketplace. Restrictive covenants, however, and the extent of those restrictions are more commonly discussed in much greater detail where the buyer is from outside the Amazon eco-system, and it adopts a more traditional (and extensive) approach to restrictive covenants that often cuts through a seller’s post-closing plans.
- Transitional Assistance
Many Amazon FBA business have no employees and no management team, other than the seller (and perhaps his/her spouse). Diligence will only tell a buyer so much and because of that, buyer’s often need support from sellers to transfer the day-to-day tasks associated with operating the target company and its Amazon FBA business. Although the broad concept of post-closing seller support is accepted across virtually all stakeholders in the Amazon eco-system, the length of that support and the number of days that support must be provided for is often something that is a key discussion point for a seller.
- Buyer Guarantee
Term sheets are often signed by an aggregator’s top company or main operating company – i.e. the entity you see in the news that has recently closed a mega funding round to continue its roll-up play the seller is now a part of. When the SPA arrives though, you often see that heavily capitalized top company or main operating company substituted for a special purpose acquisition vehicle that has virtually no covenant strength or trading history. For that reason, parent company guarantees are often provided by an aggregator to alleviate any concerns a seller and his counsel may have about the buying vehicle’s ability to satisfy its future payment obligations under the SPA.
Guarantees can become a ‘sticky’ issue though where an aggregator has complex financing and the terms of a guarantee then become something that is looked at more closely by the parties (and in some instances the aggregator’s funders’ counsel) to make sure it works for all sides.
SPAs can be negotiated and settled efficiently where both parties are reasonable, and their advisers have experience of the Amazon ecosystem and digital marketplaces, and recognise value and risk areas in an Amazon FBA deal.
