Letter of Intent Template for Acquiring a Wholesale Distribution Business

1. Parties and Transaction Overview

Identifies the buyer entity, seller entity, and the legal structure of the proposed transaction. For distribution acquisitions, most deals are structured as asset purchases to allow selective assumption of supplier contracts and avoid inheriting undisclosed liabilities tied to legacy inventory or customer disputes.

💡 Sellers of distribution businesses often prefer stock sales to preserve favorable tax treatment and avoid triggering supplier agreement transfer clauses. Buyers should push firmly for an asset purchase structure so they can selectively assume only the supplier contracts that have been confirmed transferable in writing. If the seller insists on a stock sale, require comprehensive reps and warranties on all undisclosed liabilities and conduct a deeper inventory audit before closing.

2. Purchase Price and Valuation Basis

States the proposed total enterprise value, the SDE or EBITDA multiple being applied, and any inventory adjustment mechanism. Distribution businesses are priced on a multiple of SDE or EBITDA typically ranging from 2.5x to 4.5x depending on margin quality, customer diversification, and exclusivity of supplier agreements. Inventory is typically handled separately from the goodwill multiple.

💡 Inventory valuation is one of the most contentious points in distribution deals. Sellers often carry inventory on their books at cost while buyers are concerned about obsolete or slow-moving SKUs that will require markdowns or write-offs post-close. Negotiate the inventory adjustment mechanism in the LOI, not just in the definitive agreement. Establish clear categories for slow-moving inventory and agree on who bears the risk. For SBA 7(a) financing, the lender will conduct an independent inventory appraisal, so align your LOI terms with what the SBA will accept.

3. Deal Structure and Financing

Outlines how the acquisition will be financed, including the SBA 7(a) loan component, buyer equity injection, seller note, and any earnout provisions tied to operational milestones. Distribution acquisitions are commonly SBA-eligible and lend themselves to structured consideration that bridges valuation gaps.

💡 Sellers in distribution deals are often skeptical of earnouts because they feel exposed to buyer operational decisions post-close. To make the earnout more palatable, tie it to objective and external metrics — specifically, supplier agreement retention and customer revenue thresholds — rather than EBITDA, which is easier to manipulate. For SBA deals, confirm with your lender early that the seller note structure is compliant with SBA standby requirements, as improper structuring can delay or derail SBA approval.

4. Supplier Agreement and Exclusivity Confirmation

Requires the seller to deliver written confirmation from key suppliers that all distribution agreements, including any exclusive or preferred distributor designations, are transferable to the buyer entity as a condition of closing. This is a non-negotiable due diligence item in distribution acquisitions.

💡 This is the single most important protective clause in a distribution LOI. Many distribution agreements contain change-of-control provisions that technically void the exclusivity upon a sale. Sellers frequently downplay this risk. Require the seller to initiate supplier conversations immediately upon LOI execution — do not wait until deep into due diligence. If a key supplier refuses to confirm transferability, you need to know before you spend money on QofE, legal fees, and SBA appraisal costs. Consider negotiating a price reduction mechanism if one or more supplier agreements cannot be confirmed.

5. Working Capital Target and Adjustment

Establishes the expected level of net working capital to be delivered at closing, accounting for the inherently capital-intensive nature of distribution businesses with significant receivables and inventory cycles. A working capital peg protects the buyer from receiving a business with artificially depleted receivables or inflated payables.

💡 Distribution businesses have lumpy working capital profiles driven by inventory seasonality, supplier payment terms, and customer credit extension. Sellers often try to set the working capital peg at a favorable low point in the seasonal cycle. Pull monthly balance sheets for a full 24-month period and calculate a true average to set the peg. Pay particular attention to accounts receivable aging — in distribution, it is common to find significant balances with customers who are slow payers or in dispute. Exclude receivables older than 90 days from the transferred assets.

6. Exclusivity and No-Shop Period

Grants the buyer an exclusive negotiating window during which the seller agrees not to solicit or entertain competing offers. In distribution deals, 60 to 90 days is standard given the complexity of supplier confirmation, inventory audit, and SBA lender processing.

💡 Sellers of distribution businesses often receive multiple inquiries given the stability and cash flow characteristics of the sector. Do not accept a 30-day exclusivity window — SBA lender processing alone can take 45 to 60 days. Request 90 days with a mutual extension option. If the seller pushes back, consider offering a small good-faith deposit (fully refundable except in cases of buyer default) to compensate them for taking the business off the market.

7. Due Diligence Scope and Access

Defines the scope of due diligence the buyer requires, including financial, operational, legal, and supplier-specific investigation. For distribution businesses, due diligence must explicitly cover inventory inspection, supplier agreement review, customer concentration analysis, and logistics infrastructure assessment.

💡 Sellers of distribution businesses are often protective of customer and supplier lists until late in the process, fearing competitive exposure. Negotiate tiered access: financial documents and supplier agreements in the first two weeks, customer-level detail (with NDA protections) in weeks three and four, and supplier or key customer introductions only after a substantive path to closing is confirmed. On the inventory inspection, insist on conducting a physical count rather than relying solely on the seller's inventory management system — discrepancies between book and physical inventory are common.

8. Representations and Warranties Preview

Signals the key representations the seller will be expected to make in the definitive purchase agreement, with particular emphasis on the accuracy of supplier agreement terms, inventory valuation, and customer relationship disclosures.

💡 In lower middle market distribution deals, sellers rarely carry rep and warranty insurance, so the quality of the reps themselves and the seller's indemnification capacity matter greatly. Pay close attention to the supplier agreement rep — require the seller to attach all agreements as disclosure schedules so there is no ambiguity about what was represented. For SBA deals, the lender will require clean title to all transferred assets, so any liens on inventory or equipment must be disclosed and resolved at closing.

9. Employee Retention and Transition

Addresses the treatment of employees post-close, with particular attention to key operations staff, warehouse managers, and any sales personnel who hold critical customer or supplier relationships.

💡 Distribution businesses often have long-tenured warehouse staff, drivers, and inside sales reps whose institutional knowledge of customer preferences and order patterns is genuinely irreplaceable. Identify these individuals early and treat retention as a deal risk, not an afterthought. If the seller has a key operations manager who handles supplier ordering and customer service, the departure of that individual post-close could impair business performance and trigger an earnout miss. Consider structuring that individual's retention bonus as a shared cost between buyer and seller.

10. Confidentiality and Governing Law

Confirms the mutual confidentiality obligations of the parties during the LOI period and identifies the governing law and dispute resolution framework.

💡 In distribution deals, confidentiality is especially important because the competitive landscape in regional markets is often tight and any leak that a business is for sale can alarm suppliers, prompt competitors to target key accounts, and cause employee anxiety. Ensure the NDA executed at the outset of the process and the confidentiality clause in this LOI are aligned and enforceable. Sellers should limit knowledge of the sale to essential personnel until after closing is highly certain.