Sale Process

Why Deals Die After the LOI Is Signed

There is a companion question to this one: why some businesses never attract an offer at all. That is largely about price, presentation, and preparation, and we cover it separately.

This article is about the more painful failure. You went to market. You got interest. You negotiated. You signed a letter of intent. Everyone shook hands.

And then, three months later, it was over.

What signing an LOI actually does to your position

Understanding post-LOI failure starts with understanding what the LOI changed.

The price in an LOI is almost always non-binding. The exclusivity is not. In signing, you have typically agreed to stop talking to other buyers for 60 to 120 days.

Think about what that means. Before signing, you had competitive tension — the thing that produced the offer in the first place. After signing, you have one buyer, a clock, and mounting professional fees. Your other buyers have been told you are under LOI, and some are already looking elsewhere.

Your leverage does not decline gradually over the exclusivity period. It drops the moment you sign, and every subsequent week of expense and emotional investment weakens it further. A buyer who wants to renegotiate in month three is negotiating with someone who has spent $60,000 on advisors and told their spouse it is happening.

This is not an argument against LOIs, which are a necessary part of any real process. It is an argument for getting more settled before you sign, while you still have alternatives.

The retrade

The most common way a deal dies is not a dramatic collapse. It is a price reduction the seller refuses, or accepts and resents.

A retrade is a buyer reducing their offer after diligence. Sometimes it is entirely legitimate: they found something real that changes the value. Sometimes it is a tactic, executed by a buyer who bid high precisely to win exclusivity and always intended to grind the number down once you had no alternatives.

Distinguishing the two matters. The legitimate retrade points at a specific, documented finding and adjusts by an amount that bears a relationship to it. The tactical one arrives late, cites a vague accumulation of concerns, and lands at a number suspiciously close to what the buyer was willing to pay all along.

The best protection is not being clever in the moment. It is having nothing left to find.

Quality of earnings: where optimistic numbers go to die

Any serious buyer will commission a quality of earnings analysis — an independent accounting review of whether your reported EBITDA is real and sustainable.

This is where addbacks get tested. An addback with an invoice, a bank statement, and a coherent explanation survives. An addback that amounts to "that was unusual" does not.

The failure pattern is remarkably consistent. A seller presents $1.2M of adjusted EBITDA. The QofE accepts $980,000. At a 5x multiple, that is a $1.1 million reduction in value, and it arrives at week eight of exclusivity when the seller has no alternatives left.

Nothing dishonest necessarily happened. The seller's adjustments were optimistic rather than fraudulent. But optimistic adjustments do not survive an accountant, and the time to discover that is before you have given away exclusivity — which is precisely what a sell-side quality of earnings review buys you.

Financing

Many middle market buyers are borrowing a substantial part of the purchase price, frequently through SBA-backed lending. That introduces a third party with its own view.

Financing fails for reasons that have nothing to do with you: the buyer's personal credit, their liquidity, another business they own performing badly. It also fails for reasons that have everything to do with you — a bank appraisal below the agreed price, or financials that cannot support the debt service the deal requires.

The seller-side lesson is to qualify buyers on financing before granting exclusivity, not after. A proof of funds letter or a lender pre-approval is a reasonable thing to ask for. Enthusiasm is not a source of capital.

The business slips while you are distracted

A sale process takes six to twelve months and consumes an enormous amount of the owner's attention at exactly the moment the business needs to be performing.

Buyers track monthly performance throughout diligence. If revenue softens or margins compress during exclusivity, you have handed them a legitimate reason to reprice — and a genuine question about whether what they are buying is what they agreed to buy.

There is no trick here. Someone has to keep running the company. If that person is you, then someone else has to run the process, which is most of the practical argument for having an advisor at all.

The thing you did not mention

Underneath most post-LOI failures is a specific fact the seller knew and chose not to raise.

A key customer who has given notice. An employment claim. A worker classification arrangement that would not withstand scrutiny. An informal understanding with a landlord. A supplier relationship that depends on a personal friendship.

Buyers find these. That is what diligence is. And the damage is rarely proportionate to the problem itself — it is proportionate to the discovery. A disclosed issue is a negotiation. The same issue found by the buyer's accountant in week nine is a trust problem, and once a buyer starts wondering what else you have not mentioned, small findings become disproportionate.

Disclosing early costs you something. It almost always costs less than being found out.

What reduces the risk

• Run your own quality of earnings review before you go to market, and fix what it finds.
• Qualify buyers on financing capacity before granting exclusivity.
• Negotiate a shorter exclusivity period, with extensions conditional on progress.
• Get more decided in the LOI — working capital targets, escrow, indemnity caps — while you still have competitors.
• Disclose known problems early, in writing, on your own terms.
• Keep running the business as though the deal will not happen.

None of this eliminates the risk. Deals fail for reasons nobody controls. But the large majority of post-LOI failures we would expect to see are foreseeable months in advance — and that is a preparation problem, not bad luck.

Most of what kills a deal after the LOI is visible before you go to market. That is the work we do first.

← Back to Resources