Private Offering — Reg D Rule 506(b)

Leatherwood Manufacturing

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This material is confidential and intended solely for accredited investors as defined under Rule 501(a) of Regulation D. By entering, you acknowledge that you are an accredited investor and agree to keep the contents confidential. This does not constitute an offer to sell or a solicitation to buy securities. Any offer will be made only by means of a definitive private placement memorandum.

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The total amount paid to the seller to acquire the business. Every other number in the deal derives from this.

This is the anchor. It determines how much you need to raise, what the seller carries, and what return multiple is realistic at exit.

A loan from the seller to the buyer, paid back over time from the business's cash flow. Instead of getting all cash at closing, the seller agrees to be paid over time with interest.

A seller who carries a note stays financially invested in your success. It reduces the cash you need to raise and signals the seller's confidence in the business. If the seller is not willing to carry a note, ask yourself why.

The cash left in the business after paying the seller and all closing costs. This is your operating runway from Day 1.

Too little working capital means the business is fragile from day one. Too much means you raised more than you needed, which dilutes investor returns.

The investigation period where the buyer examines the business's financials, contracts, employees, legal issues, equipment, and anything else that affects value.

Due diligence is your last chance to uncover problems before you write the check. Skipping or rushing diligence is the number one cause of bad deals.

A written offer outlining the key deal terms (price, structure, timeline) before the buyer and seller spend money on lawyers and accountants. Most of the LOI is non-binding, except confidentiality and exclusivity.

The LOI sets the framework for the entire deal. Once signed, it is psychologically and practically difficult to renegotiate major terms. Get the LOI right.

A preliminary, non-binding expression of interest from a buyer to a seller, usually with a price range and general terms. Less detailed than a Letter of Intent.

An IOI lets you signal serious interest without committing to specific terms. It is the opening move before an LOI.

An independent financial review performed by accountants during due diligence. It verifies whether the business's reported profits are real, recurring, and sustainable.

A quality of earnings report is the single most important document in diligence. It separates real profits from one-time events, owner perks, and accounting tricks.

Short for capitalization table. A spreadsheet showing who owns what percentage of the company, including investors, the promoter, and anyone with equity grants.

The cap table is the definitive record of ownership. Before investing, verify your percentage, confirm there is no hidden dilution, and understand how management equity affects your share.

Additional purchase price paid to the seller only if the business hits certain targets after closing (usually revenue or operating earnings milestones).

Earnouts bridge valuation gaps — the buyer pays less upfront and more only if the business performs. But they are a leading source of post-closing litigation because the buyer controls operations while the seller's payout depends on performance.

A portion of the purchase price held by a neutral third party (escrow) or retained by the buyer (holdback) after closing to cover potential claims under the seller's representations and warranties.

If problems surface after closing (undisclosed liabilities, tax issues, customer losses), the escrow is the fund that compensates the buyer. Investors should understand how much of the price is held back and for how long.

The total value of the business — what it would cost to buy it outright. Equity value is enterprise value minus debt plus cash. Like a house: enterprise value is the home price, equity value is your equity after the mortgage.

When someone says a business is worth '6x operating earnings,' they mean enterprise value. Your actual return as an equity investor depends on how much debt sits between enterprise value and equity value.

A contract where the seller agrees to provide certain services (introductions, training, operational support) to the buyer for a defined period after closing.

A TSA is essential when the seller has deep institutional knowledge. It bridges the gap between old ownership and new management.

A demand by the managing member for investors to contribute additional capital beyond their initial investment, as permitted by the Operating Agreement.

If the business needs more money than planned, investors may be asked to contribute more. The Operating Agreement should clearly state whether capital calls are permitted and the consequences of not participating.

A reduction in your ownership percentage caused by the company issuing new equity to other people. If you own 10% and the company doubles its total units, you now own 5% unless you buy more.

Understand what can dilute you: future capital raises, management equity grants, conversion of debt to equity. The Operating Agreement should specify anti-dilution protections or pre-emptive rights.

Any event that converts your illiquid ownership interest into cash — typically a sale of the company, a recapitalization, or rarely an IPO.

Private investments are illiquid. Unlike public stocks, you cannot sell whenever you want. Understanding the expected timeline to exit (3-7 years) is essential for managing your personal finances.

How many times an investor gets their money back. A 6x MOIC on a $150,000 investment means you receive $900,000 total.

MOIC is the simplest measure of whether this deal is worth doing. It answers the question every investor asks: how much do I get back for what I put in?

The annualized percentage return on an investment, accounting for the timing of cash flows. A 5x MOIC in 3 years is a much higher IRR than a 5x in 10 years.

IRR lets investors compare this deal to other places they could put their money — stocks, real estate, other private deals. It penalizes deals that tie up capital for a long time.

The order in which money flows to different people when the business distributes cash or sells. Like a real waterfall, each level fills up before water flows to the next.

The waterfall determines who gets paid, in what order, and how much. It is the single most important economic provision in your Operating Agreement.

The promoter's share of profits above what investors receive. If the promoter has a 20% promote, they get 20 cents of every dollar of profit after investors get their capital back.

The promote is how the deal sponsor gets rewarded for finding, structuring, and managing the deal. It only kicks in after investors are made whole — the promoter only wins when investors win.

A minimum annual return that investors receive before the promoter earns any carried interest. Think of it as the investor's baseline — profits below this level go entirely to investors.

A preferred return protects investors by ensuring the promoter only profits after a minimum bar is cleared. Not every deal uses one — some structures return capital first instead, which can be more investor-friendly in practice.

The operating earnings multiple at which you expect to sell the business. If the business earns $3M and sells at 6x, the sale price is $18M.

The exit multiple is the biggest lever in the return calculation. Even if earnings stay flat, buying at 4x and selling at 6x creates a 50% return on the multiple expansion alone.

A cash payment from the LLC to its members. Unlike a salary, distributions represent your share of the company's profits and are governed by the waterfall in the Operating Agreement.

Distributions are how investors actually receive cash returns. The timing, frequency, and priority should be clearly defined. Some deals restrict distributions until certain conditions are met.

The repayment of an investor's original investment before any profits are divided. In a well-structured deal, investors get their full contribution back before the promoter earns a cent of carry.

Return of capital is the first gate in the waterfall — it is what separates a deal where you get your money back from one where you only share in profits on paper.

The expected number of years from acquisition to exit. The hold period is an assumption, not a guarantee — most private deals target 5-7 years.

The hold period transforms a MOIC into an IRR. A 5x return in 5 years is materially different from a 5x return in 10 years. Your personal liquidity needs should match the expected hold.

Earnings Before Interest, Taxes, Depreciation, and Amortization — how much money the business makes from its core operations before accounting for debt payments, taxes, and non-cash expenses.

Buyers price businesses as a multiple of EBITDA. Growing operating earnings is the single biggest lever for increasing the value of your investment.

The actual cash left over after the business pays all its bills, makes required debt payments, and invests in equipment. This is money that can be saved, distributed, or reinvested.

EBITDA tells you how the business performs on paper. Free cash flow tells you how much real cash is available. A business can have great EBITDA but poor FCF if it needs heavy capital spending.

The direct costs of making the product — raw materials, direct labor on the shop floor, and machine time. Does not include overhead like rent or office salaries.

COGS as a percentage of revenue is your gross margin. In manufacturing, materials and direct labor are the biggest controllable costs. Reducing COGS by even 2-3 points flows straight to profit.

Revenue minus cost of goods sold, expressed as a percentage. If a business has $5M revenue and $3M in direct costs, its gross margin is 40%.

Gross margin measures pricing power and production efficiency. In aerospace machining, gross margins typically range from 35-55%. Below that range, the business may be underpricing or has structural cost issues.

How many times over the business can pay its required debt payments from operating income. A DSCR of 2.0x means the business earns twice what it needs to cover its loans.

Lenders use DSCR to decide whether to approve and maintain a loan. Below 1.0x means the business cannot cover its debt from operations — a serious warning sign. Most covenants require 1.25x or higher.

An annual fee paid to the deal promoter (sponsor) for overseeing the investment, managing investor relations, and running the business. Calculated as a percentage of the total capital raised — not revenue.

This is a fixed, predictable cost that investors can evaluate before committing. Because it is based on fund size, it stays the same whether the business grows fast or has a slow year. Typical range is 1.5–3%.

EBITDA plus the owner's total compensation (salary, benefits, personal expenses run through the business). Used to value smaller businesses where the owner is also the operator.

For businesses under roughly $5M in revenue, SDE is often more meaningful than EBITDA because the owner's compensation is a large percentage of total expenses.

An expense that is added back to earnings because it is non-recurring, owner-specific, or will not continue after the acquisition. Examples: the owner's above-market salary, one-time legal fees, personal car expenses.

Add-backs directly increase the adjusted EBITDA used to price the deal. Every dollar of add-backs, multiplied by the exit multiple, inflates the purchase price. Challenge every add-back aggressively.

The most recent 12-month period of financial performance, updated monthly. It smooths out seasonality and gives a more current view than the last fiscal year.

TTM revenue and EBITDA are the baseline for valuation. If the last fiscal year ended 8 months ago, a lot may have changed. TTM keeps the numbers current.

Signed orders or contracts the business has received but has not yet completed or delivered. It represents future revenue that is already committed.

In manufacturing and defense contracting, backlog is a leading indicator of future revenue. A strong backlog at closing gives investors confidence in near-term cash flow.

Money spent on long-term assets like machines, equipment, vehicles, and building improvements. Unlike operating expenses, CapEx is depreciated over time rather than expensed immediately.

CapEx requirements directly reduce free cash flow. A business that needs $500K/year in new equipment is worth less than one that needs $50K. Always ask about maintenance CapEx vs. growth CapEx.

The percentage of revenue coming from a small number of customers. If one customer represents more than 20% of revenue, that is significant concentration risk.

Losing a concentrated customer can be catastrophic. Buyers typically discount the purchase price for high concentration. Lenders may also restrict borrowing if revenue is too concentrated.

The risk that the business depends heavily on one individual (often the owner) and would suffer significantly if that person left, became disabled, or died.

In a deal where the seller is transitioning out, key person risk is critical. If the seller's relationships, knowledge, or skills cannot be transferred, the value of the business may decline post-closing.

A pre-approved borrowing facility from a bank that the business can draw on as needed. You only pay interest on what you actually use. Think of it as a safety-net credit card for the business.

A line of credit provides liquidity for unexpected expenses, seasonal swings, or growth opportunities without requiring investors to contribute more capital.

A government-backed loan program where the SBA guarantees a portion of the loan, making banks more willing to lend. SBA 7(a) loans are commonly used for acquisitions.

SBA loans offer longer terms and lower down payments than conventional loans. They are the most common financing tool for small business acquisitions under $5M.

Senior debt gets paid first if the business cannot cover all its obligations. Subordinated (junior) debt gets paid only after senior debt is satisfied. Seller notes are typically subordinated.

The priority of debt directly affects risk. In a downside scenario, senior lenders get paid first. Investors should understand where the seller note sits relative to bank debt.

A promise by an individual (usually the managing member) to personally repay a business loan if the business cannot. The lender can go after the guarantor's personal assets.

Most lenders require personal guarantees for small business loans. It is both a risk factor for the promoter and a sign of commitment to the deal.

A promise in a loan agreement to do (or not do) certain things. Financial covenants require maintaining certain ratios. Operating covenants restrict actions like taking on more debt without lender approval.

Violating a loan covenant — even if you are making all payments on time — can trigger a default, allowing the lender to accelerate the loan. Understand what covenants exist and how tight they are.

A tax election that treats the purchase of a company's stock as if the buyer purchased its individual assets instead. This lets the buyer depreciate the purchase price over time, creating valuable tax deductions.

A 338(h)(10) election can generate significant tax deductions for the buyer over the hold period. Available only for S-Corp targets and requires seller cooperation.

A federal tax benefit for C-Corp shareholders under IRC Section 1202. If the stock qualifies, investors can exclude up to $10 million in capital gains from taxes when the business is sold.

QSBS can eliminate capital gains tax entirely on a successful exit. It only applies to C-Corps held for at least 5 years — LLC deals like most private acquisitions do not qualify.

A tax structure where business profits flow through to the owners' personal tax returns instead of being taxed at the corporate level. LLCs and S-Corps are pass-through entities.

Pass-through taxation means profits are only taxed once. In a C-Corp, profits are taxed at the corporate level and again when distributed as dividends — paying tax twice on the same dollar.

A tax form that an LLC sends to each member showing their share of the business's income, losses, deductions, and credits for the year. You use it to file your personal taxes.

As an LLC investor, the income on your K-1 is taxable to you whether or not you actually received a cash distribution. K-1s are often issued late (March-April), which may delay your personal tax filing.

An ownership interest in an LLC that entitles the holder to a share of future profits and appreciation — but not to any value that existed at the time of grant. Used as equity compensation without requiring the recipient to buy in.

Profits interests are how managers and key employees receive equity without paying for it or being taxed at grant. They only participate in value created after they are brought on.

A tax filing that lets you pay tax on equity compensation at the time of grant (when the value is low or zero) instead of when it vests (when the value may be much higher).

For profits interest holders, filing an 83(b) election within 30 days of receiving the interest is critical. Missing this deadline can result in being taxed on the full value at vesting.

A corporation that elects pass-through tax treatment — profits flow through to the owner's personal tax return. Limited to 100 shareholders, one class of stock, all must be US individuals.

S-Corps cannot support a tiered waterfall because they allow only one class of stock. If you are acquiring an S-Corp, you will typically form a new LLC as the acquiring entity.

A standard corporation that pays tax at the entity level (currently 21% federal), and shareholders pay tax again on dividends — known as double taxation.

C-Corps allow unlimited shareholders and multiple classes of stock, making them flexible for complex capital structures. The trade-off is double taxation — unless the investment qualifies for QSBS.

A business structure that combines the liability protection of a corporation with the pass-through taxation of a partnership. The most flexible entity type for private acquisitions.

The LLC is the standard entity for private acquisition deals because it offers pass-through taxation, customizable economic rights (waterfalls, promotes), and limited liability for investors.

The governing document of an LLC. It defines who owns what, how profits are split, who makes decisions, and what happens when someone wants out.

The Operating Agreement IS the deal. Every economic term, voting right, transfer restriction, and exit mechanism lives here. Read every word before investing.

Statements of fact made by the seller about the business — that the financials are accurate, there are no hidden lawsuits, taxes are paid, contracts are valid. If any statement turns out to be false, the buyer has a claim.

Reps and warranties are the buyer's primary contractual protection. The scope, qualifiers, and survival periods determine how much protection you actually have.

The contractual right to be compensated for losses caused by the other party's breach of their representations, warranties, or covenants. The enforcement mechanism behind the reps.

Without indemnification, reps and warranties are just words. The indemnity cap, basket (deductible), survival period, and escrow determine whether you can actually recover if something goes wrong.

Restrictions preventing the seller from starting or joining a competing business (non-compete) or hiring away employees and customers (non-solicitation) for a specified period after closing.

If the seller can immediately open a competing shop across the street and take all the customers, your investment is at risk. These covenants protect the value you paid for.

Tag-along: if the majority sells, minority investors can sell on the same terms. Drag-along: if the majority wants to sell, they can require the minority to sell too.

Tag-along prevents the promoter from selling at a premium while leaving investors behind. Drag-along prevents a single holdout from blocking a sale that benefits everyone.

A provision giving existing members the right to buy a departing member's interest before it can be sold to an outside party, typically at the same price and terms.

ROFRs protect existing investors from unwanted new partners. But they also limit an investor's ability to sell their interest — the existing members effectively control the exit.

A formal disclosure document provided to potential investors describing the deal, the risks, the terms, and the business. Similar to a prospectus for a public company but for private deals.

A well-drafted PPM protects the promoter from investor lawsuits by proving that all material risks were disclosed.

The contract an investor signs to commit capital to the deal. It includes the investor's representations that they are accredited, understand the risks, and accept the terms.

The subscription agreement is the investor's binding commitment. It also contains accreditation representations that protect the promoter if the exemption is later challenged.

A provision preventing the seller from negotiating with other potential buyers for a specified period, typically 30-90 days.

Exclusivity protects the buyer's investment in due diligence. Without it, the seller could use your offer to extract a higher price from a competing bidder while you spend money on lawyers and accountants.

A secure online folder where the seller shares confidential business documents — financials, contracts, employee records, tax returns — with the buyer during due diligence.

A well-organized data room signals a professional seller. A messy or incomplete data room is a red flag and slows the deal. As a promoter, you will build a data room for your investors as well.