What belongs in a manufacturing letter of intent before exclusivity?
Buying a manufacturing business reaches LOI after evaluation survives. How it works is the spine. Counsel drafts the binding lines. This page is the buyer checklist of topics that must appear.
What the letter has to decide
Price and structure. Cash-free, debt-free enterprise value. Asset versus stock. Whether real estate is parallel. Form 8594 / IRC § 1060 thinking can wait for counsel, but the letter should not pretend allocation will be "friendly."
Peg. Method, look-back, E&O, customer-owned tooling, count date. See the buyer peg explainer and the deal peg page. "Customary NWC" is how manufacturing files blow up.
QoE. Who pays, which firm, the scope (tax versus job-cost), and what happens if the report kills $400,000 of EBITDA: a dollars-per-turn formula or a walk right. Exclusivity should slip if the seller stalls the room.
Financing condition. Name the path. SBA 7(a) maximum is $5 million. SOP 50 10 8 requires a 10% injection. A seller note counts as equity only on full standby — no principal and no interest — for the life of the 7(a) and only up to 50% of the injection (Source: SBA). If your letter assumes current interest on that note and SBA equity math, you wrote a collision. Combined 7(a)+504 can reach $10 million of SBA-backed financing under the 2026 notice for borrowers who fit both programs (Source: SBA). Occupancy still applies.
People and access. Stay bonuses, who may visit, when customer calls happen. Late, scripted.
Earn-out. Only if concentration or a consent is the open item. Measure gross profit on named accounts, not "EBITDA after buyer allocations." Lenders usually ignore earn-outs as repayment.
| LOI clause | Manufacturing-specific failure | Cleaner version |
|---|---|---|
| Price | Multiple with no size band | EV, cash-free / debt-free, stated earnings basis |
| Peg | "Customary" | Formula + count date + E&O + WIP rule |
| Exclusivity | Open-ended while seller drips files | Dated, with slip rights if rooms stall |
| QoE | Silent | Payer, firm, price-adjustment rule |
| Financing | "SBA TBD" | Cap, injection, standby vs amortizing note |
| RE | Buried in EV | In or out, cap-rate later |
| Employees | "Team will stay" | Named stays, funded |
| Gov / ITAR | Omitted | Novation / DDTC owners and dates |
Competitive processes and sloppy letters
IBBA Q1 2026: 83% of deals over $5 million attracted three or more offers (Source: IBBA). A letter that looks like a tourist — no peg, no QoE rule, a 7(a) fantasy — loses to a letter a lender can finance. Main Street files in BizBuySell's 2021–2025 set still live near 2.75x median SDE (Source: BizBuySell via Iconic). The letter should match the band. Stanford's $16 million / 6.2x / ~25% margin median is a search-fund profile (Source: Stanford GSB), never a job-shop multiple, and never a reason to write 6.2x on a 9% fabricator.
BizBuySell 2025 manufacturing median close was 223 days (Source: BizBuySell). Exclusivity of 45–75 days is a common conversation, not a statute. If Phase I, appraisal, and QoE cannot fit, you wrote a setup for breach or a rushed close.
After the letter, the agreement should not surprise you
The purchase agreement executes the freeze list: reps, indemnities, escrow (5–15% for 12–24 months is a common Main Street / lower-LMM rule-of-thumb), novation, lease assignment, UCC releases. If the APA invents a new peg, you are renegotiating. Say so.
R&W insurance is more typical as EV and diligence cost rise. Do not assume it on an SDE shop.
What to leave out of the letter on purpose
Do not put customer names in an LOI that will sit in email. Do not put a financing "soft quote" you invented. Do not put a Stanford 6.2x because the study felt sophisticated (Source: Stanford GSB). Do not put a 30-day close on an SBA plant file when BizBuySell's manufacturing median is 223 days (Source: BizBuySell). Do not put "team will stay" without names and dollars.
Confidentiality and publicity clauses belong here. A buyer who wants to announce the LOI on LinkedIn is asking the seller to announce a sale to the floor. Decline. Plant-visit protocol still applies after the letter: no branded fleece, no unscripted interviews.
Expense allocation should be boring and written: each side pays its own counsel; buyer pays QoE, appraisal, and Phase I unless you negotiated otherwise; breakup fees are rare on Main Street and should not be copied from a PE form you liked. Escrow percentages can wait for the APA if you state that indemnity and holdback will be "customary for size" only as a placeholder — then actually negotiate them. The 5–15% / 12–24 month rule-of-thumb is a later conversation, not a silent assumption.
How a manufacturing letter differs from a software letter
Software LOIs argue about recurring revenue and key-person equity. Plant LOIs argue about iron, dirt, WIP, and certificates. If your template came from a SaaS search, rewrite it. Add the machine-list appraisal scope. Add the physical-count protocol. Add certificate-transfer cooperation. Add environmental walk rights after a REC. Add novation and DDTC calendars if the book has government or ITAR work.
A composite file, not a listing: $2.4 million EV plastics shop, molds split between customer-owned and house, 504 on the building, 7(a) on the equity value. The letter must say which molds transfer, who pays to move a house mold, and whether 504 occupancy is a condition. Combined SBA-backed financing can reach $10 million under the 2026 notice (Source: SBA). That sentence does not belong in the letter as a boast. The conditions that make it true do.
Evaluation should already have killed files that cannot support a letter. If you are writing LOIs to "get in the process" without a stack, you are the tourist IBBA's 83% three-offer statistic will walk over (Source: IBBA). Main Street SDE shops near 2.75x (Source: BizBuySell via Iconic) still deserve a peg clause. Small is not simple.
ISM Prices 71.1 (Source: ISM) can justify a letter condition on material-pass-through disclosure. It cannot justify a price you copied from a newsletter. Fed utilization 76.0% (Source: Fed G.17) does not belong in the letter at all.
Non-solicit and non-hire of employees during exclusivity protect the seller from a buyer who tours as a recruiter. Reciprocal language can protect you from a seller who shops your stay candidates. Counsel drafts it. You should ask for it.
Access schedules beat open-ended "reasonable access." Name the number of visits, the specialists allowed (EP, appraiser, QoE field, lender), and the cover story. Census CBP's 68.4% of establishments under 20 employees (Source: Census CBP) means a stranger is news. Plan for that.
A freeze-list you can paste into a counsel memo
Price: cash-free, debt-free EV of $X on TTM adjusted earnings of $Y, size band and sub-sector named. Peg: AR + owned inventory − AP, trailing 12, E&O per attached policy, WIP at cost finishable without the seller, customer-owned excluded, count on close date, true-up in 30 days. QoE: buyer pays Firm Z; if adjusted earnings fall more than $A, price moves $A times the implied multiple or either party may walk. Financing: 7(a) not to exceed $5 million with 10% injection; seller note standby or not, stated (Source: SBA). Real estate: in or out. Stays: named people, dollars, vest. Access: N visits, specialists listed. Publicity: none.
That memo is not an LOI. It is how you brief counsel so the letter matches the plant. Main Street 2.75x SDE files (Source: BizBuySell via Iconic) still need it. Stanford $16 million / 6.2x / ~25% margin files (Source: Stanford GSB) still need it. The median is never a job-shop multiple. Combined 7(a)+504 can reach $10 million (Source: SBA) — only if you state both products and occupancy.
IBBA's 83% three-offer statistic (Source: IBBA) means a memo like this is how you look like a closer. ISM Prices 71.1 (Source: ISM) can sit in a disclosure ask. Fed utilization 76.0% (Source: Fed G.17) does not need to sit in the letter.
Jason Taken is a business broker, not your M&A counsel. Educational information only. No outcome is guaranteed.
Questions counsel should hear before drafting the letter
What peg method. Who pays for QoE and Phase I. What happens if earnings fall a turn. Is the note standby or amortizing. Is real estate in. Which stays are funded. How many visits. Any publicity. If you cannot brief those, you are not ready for a letter.
You are ready for another tour. Do not put customer names in an email that will sit in a inbox. Do not put a 30-day close on an SBA plant file. Do not put "team will stay" without names and dollars. Software LOI templates miss iron, dirt, WIP, and certificates. Rewrite them.
Non-solicit during exclusivity protects the seller from a buyer who tours as a recruiter. Access schedules beat open-ended reasonable access. Name the specialists. Small shops leak.
HedgeStone will not send a letter that a lender cannot finance or that omits a peg method. Brief counsel with the freeze list. Then sign something a credit committee can read. A tourist letter loses to a letter that already knows standby versus amortizing.
Exclusivity is a clock you have to staff
Exclusivity that expires before the Phase I and the QoE can land is how you lose the file to a buyer who already knew the manufacturing calendar. BizBuySell's 223-day manufacturing median exists because packaging, counts, and appraisals take time. A 30-day close demand on an SBA plant file is a process flag, not toughness. Name the specialists in the access schedule so the seller is not surprised when an environmental consultant and a QoE senior show up in the same week. Non-solicit during exclusivity protects the seller from a buyer who tours as a recruiter. Small shops leak. Do not put customer names in an email that will sit in an inbox. Do not put team will stay without names and dollars. A software LOI template will miss iron, dirt, WIP, and certificates. Rewrite it so a credit committee can read standby versus amortizing on the first page.