Letter of Intent Template for Acquiring an Industrial Supply Distribution Business

Identification of Parties and Business

Clearly identify the buyer entity, the seller, and the target business including its legal name, operating name, primary location, and a brief description of operations. For industrial distributors, this should note the primary product categories served (e.g., MRO, safety, fasteners, cutting tools) and the customer markets served (e.g., manufacturing, construction, facilities management).

💡 Sellers operating under multiple entity structures — for example, a separate real estate LLC alongside the operating company — must be identified clearly here. Confirm early whether the buyer is acquiring the operating entity only or also pursuing a real estate transaction, as this materially affects the deal structure and SBA loan sizing.

Transaction Structure

Define whether the transaction is structured as an asset purchase or stock purchase. The vast majority of lower middle market industrial distribution deals are structured as asset purchases, which allows the buyer to select which assets and liabilities to assume and provides a stepped-up tax basis. Specify which assets are included — typically accounts receivable, inventory, equipment, vehicles, customer lists, supplier agreements, trade names, and goodwill — and which liabilities, if any, are assumed.

💡 Some sellers, particularly those with significant built-in gains or complex entity structures, will push for a stock sale to reduce personal tax liability. Buyers should resist this in industrial distribution deals due to potential hidden liabilities including sales tax nexus exposure in multiple states, product liability claims, and environmental obligations tied to chemical or hazardous materials inventory. If a stock sale is unavoidable, obtain representations and warranties insurance.

Purchase Price and Valuation Basis

State the proposed total purchase price, the valuation methodology used (typically a multiple of trailing twelve-month SDE or EBITDA), and the assumed financial basis. For industrial distributors, the LOI should clearly note what financial performance the price is based on and acknowledge that inventory is treated separately from the enterprise value calculation.

💡 Industrial distribution deals most commonly break down over the treatment of inventory. Sellers typically want full replacement cost or cost-of-goods value for all inventory on hand. Buyers must insist on an independent inventory audit with agreed-upon methodology for excluding slow-moving, obsolete, or excess SKUs. Establish the valuation methodology — cost, net realizable value, or a negotiated percentage — in the LOI to avoid disputes at closing.

Inventory Valuation and Treatment

Because inventory often represents 20–40% of total deal value in industrial distribution transactions, it must be addressed as a standalone section in the LOI. Define how inventory will be counted, valued, and priced, and establish which categories of inventory will and will not be included in the purchase.

💡 Require the seller to produce an inventory aging schedule segmented by last-movement date within the first week of due diligence. Industrial distributors frequently carry 15–30% dead or slow-moving inventory that inflates balance sheet values. Cap the total inventory purchase to create certainty, or agree on an inventory floor and ceiling range that the final count must fall within to avoid a price renegotiation at closing.

Supplier Relationships and Contract Transferability

One of the highest-risk elements of an industrial distribution acquisition is whether key supplier agreements — including pricing tiers, volume rebates, and exclusivity arrangements — can be transferred to a new owner. This section establishes the buyer's contingency around obtaining written supplier consent and confirms the seller's obligation to facilitate introductions.

💡 Many independent distributors operate on informal pricing arrangements or handshake deals with supplier reps rather than written contracts. This is one of the most common deal-killers in the sector. During due diligence, call each key supplier directly to confirm pricing will be honored post-acquisition. If a supplier refuses to confirm terms, buyers should factor that risk into the purchase price or require a price reduction as a closing condition.

Customer Concentration and Retention Contingency

Given that customer concentration is a primary risk factor in industrial distribution acquisitions, the LOI should establish acceptable concentration thresholds and, if relevant, tie a portion of the purchase price to post-closing customer retention through an earnout or seller note holdback.

💡 Sellers will resist customer retention earnouts, arguing that post-closing customer relationships are in the buyer's control. Frame the earnout as a bridge to get the deal done at the seller's desired price rather than a penalty mechanism. Consider a seller note with a partial forgiveness provision as an alternative structure — if key accounts leave within 12 months, a portion of the seller note is forgiven rather than triggering an earnout dispute.

Financing Contingency

If the buyer intends to use SBA 7(a) financing — the most common structure for sub-$5M industrial distribution acquisitions — the LOI must include a financing contingency that protects the buyer if the loan is not approved, and must establish a timeline that aligns with SBA processing requirements.

💡 SBA lenders will require the seller to provide a personal guarantee on any seller note when the SBA loan is in first lien position. Sellers often resist this requirement. Address it early — it is a non-negotiable SBA requirement and surprises late in the process kill deals. Also confirm the business qualifies under SBA size standards and that the NAICS code for industrial distribution aligns with SBA eligibility requirements.

Exclusivity and No-Shop Period

Once an LOI is executed, the buyer needs protected time to complete due diligence without the seller continuing to market the business. For industrial distribution deals, 60–90 days of exclusivity is standard given the complexity of inventory audits, supplier confirmations, and ERP system reviews.

💡 Sellers, particularly those working with a broker, will push for shorter exclusivity windows of 30–45 days. For industrial distribution deals, this is often insufficient given the time required to complete an inventory audit and obtain supplier consent letters. Negotiate 75–90 days with a mutual extension provision, and tie the extension to demonstrated progress milestones to keep both parties accountable.

Due Diligence Access and Timeline

Outline the scope of due diligence access the buyer requires and establish a timeline for the seller to deliver key documentation. For industrial distributors, due diligence is heavily focused on financial records, inventory systems, supplier contracts, and customer account histories.

💡 Many owner-operated distributors have inconsistent financial records, informal supplier arrangements stored only in email, and ERP systems that have not been properly maintained. Build extra time into the due diligence timeline to account for this. If the seller cannot produce a coherent inventory aging report within the first two weeks, treat that as a red flag warranting additional scrutiny — or a price adjustment for inventory risk.

Transition and Non-Compete Agreement

Define the seller's obligations during the post-closing transition period, including customer introductions, supplier handoffs, and operational knowledge transfer. Establish the terms of any non-compete and non-solicitation agreement to protect the buyer's investment in customer and supplier relationships.

💡 Non-compete enforceability varies by state — consult local counsel for the appropriate geographic and temporal scope. For industrial distribution businesses where the seller's personal relationships with long-tenured customers are the primary value driver, the non-compete and transition assistance provisions are among the most commercially important terms in the entire deal. Do not treat them as boilerplate.