Why M&A Deals Fall Apart, and How Sellers Reduce Risk

Most private-company sales that collapse do not die at the negotiating table over headline price. They unravel in the weeks between a signed letter of intent and a funded closing, once a mostly nonbinding agreement meets weeks of verification. A widely cited figure in lower-middle-market advisory work holds that roughly one in three signed letters of intent never reaches a close. The causes cluster into a short list of recurring failure modes, and each one behaves differently depending on how prepared the seller's information was before buyers began to look. This article describes those failure modes in general terms for educational purposes, and is not legal, tax, financial, or investment advice.

What Changes After the LOI Is Signed

A letter of intent, or LOI, usually sets price, deal structure, and an exclusivity window, but its economic terms are typically nonbinding. Once it is signed, the buyer stops relying on the marketing narrative and starts validating every figure. As advisers often describe it, the story gets replaced by data. That shift is where many transactions are won or lost, because assumptions that felt solid in a teaser can look fragile under detailed review. Deals commonly break for a handful of reasons:

• Diligence findings that lead a buyer to lower price or change terms
• Disputes over normalized earnings and working capital
• Customer concentration and contract-assignment risk
• Buyer financing that fails to come together
• A persistent gap between the seller's price expectation and buyer value
• Seller unpreparedness, data-room gaps, and deal fatigue

Diligence Surprises and Retrading

A retrade is when a buyer tries to change price or terms after the LOI is signed, and it is usually what a buyer does with an uncomfortable diligence finding rather than a negotiating tactic on its own. Missed earnings expectations are among the most frequent triggers. When detailed data shows that earnings before interest, taxes, depreciation, and amortization, known as EBITDA, is lower than the figure marketed, the price built on that figure often moves with it. Unclear or overly aggressive expense addbacks are a related problem. If a buyer cannot follow the logic behind an adjustment or verify it, that adjustment tends to get removed, which reduces value and can erode trust in the rest of the numbers. A visible decline in performance during the exclusivity period, such as a softening quarter or the loss of a major account, also gives a buyer legitimate grounds to renegotiate, because the business in front of them is no longer the one described in the LOI.

Quality-of-Earnings and Working-Capital Disputes

A quality-of-earnings review, or QoE, examines several years of financial results to answer a single question: how much is the business really earning on a repeatable, sustainable basis. It isolates one-time revenue, non-recurring contracts, aggressive revenue recognition, and owner compensation that will not persist after closing, then arrives at a normalized EBITDA. Because most private companies are priced on a multiple of EBITDA, small changes to that number translate into large changes in value. A variance of a few hundred thousand dollars in normalized earnings can move deal value by a multiple of that amount.

Working capital is the second common flashpoint. Purchase agreements usually set a working-capital peg, a benchmark level of normalized net working capital, often based on a trailing-twelve-month average adjusted for seasonality. The peg then adjusts the price dollar for dollar: if working capital at closing exceeds the peg, the buyer pays more, and if it falls short, the seller's proceeds decline by the shortfall. Disputes tend to arise where judgment enters the calculation:

• Whether receivables are collectible and reserves are adequate
• How the allowance for doubtful accounts is computed by each side
• Inventory obsolescence and valuation
• Accrual treatment and the timing of supplier payments
• Whether an item is operational working capital or debt-like

Working-capital calculations are among the single most common sources of post-closing dispute in middle-market deals, largely because the purchase agreement did not define, in precise detail, what belongs in the calculation.

Customer Concentration and Contract Assignment

Concentration is regularly cited by advisers as one of the most common reasons a lower-middle-market process breaks. When a large share of revenue depends on a few relationships, a buyer questions how durable that revenue will be under new ownership. Published advisory analysis suggests that any customer generating more than roughly 20 percent of revenue tends to trigger a detailed buyer review, and above about 30 percent some buyers decline the process entirely, with reported valuation discounts commonly in the range of 20 to 35 percent.

Contracts add a second layer of risk. Buyers examine the term, termination, and assignment clauses of major agreements, and a change-of-control or assignment provision can allow an important customer to renegotiate or walk away when ownership transfers. The same dynamic applies to key supply agreements, where approval or renegotiation rights triggered by a sale can alter deal economics. Where concentration is significant, buyers frequently shift retention risk back to the seller through mechanisms such as customer-specific holdbacks, in which a portion of the price is held in escrow and released only if the concentrated account renews after closing on similar terms.

Financing That Falls Through

Even a motivated buyer needs the money to close. In deals that rely on borrowed funds, the buyer's ability to arrange debt depends on lender appetite, interest rates, and how much leverage the structure requires. When credit conditions tighten or a lender's underwriting reduces the amount available, a buyer can find the capital stack short of what the LOI assumed. Financing risk is often greatest with individual buyers and small acquirers who depend on bank or Small Business Administration loans, since a lender's own diligence can surface the same earnings and concentration concerns and lead the loan to shrink or disappear. Private-equity buyers and strategics face a related version of the problem when a debt component of the structure prices worse than modeled, which can force a renegotiation of price or the equity contribution. Because financing is often confirmed late in the timeline, a funding shortfall can appear after months of work, when the seller has already turned away other bidders.

Valuation Gaps and Deal Fatigue

Some deals never had a durable meeting of the minds on value. A gap between an owner's expectation and what buyers will support may be papered over in an optimistic LOI, then reopen the moment diligence confirms the buyer's lower view. Time compounds the problem. Lower-middle-market transactions frequently run six to twelve months, and as the process drags, momentum fades. Advisers often repeat that time kills deals: extended timelines create exhaustion, second-guessing, and the temptation to entertain other options, any of which can stall a transaction that was otherwise on track. Loss of momentum, rather than a single piece of bad news, is a leading reason deals quietly die. Seller indecision plays a part here too. Hesitation about whether to accept an offer, or lingering interest in a different buyer, is something acquirers detect quickly, and it can prompt a buyer to slow down or reallocate attention to another target. Long gaps between diligence requests and responses have the same effect, signaling that the seller's information was not ready and inviting deeper scrutiny.

Seller Unpreparedness and Data-Room Gaps

A recurring thread runs through the failure modes above: most of the issues existed before the sale began, but went unexamined until a buyer found them at the least convenient moment. Financial records that are not clean, addbacks that are not documented, contracts that are not organized, and a data room assembled in a hurry all invite the scrutiny that erodes buyer confidence. Sell-side diligence, sometimes called a seller QoE, is the practice of running that examination in advance so surprises are identified and addressed while the seller still has leverage, before exclusivity narrows the field to one buyer. A prepared process typically pairs a defensible earnings analysis, a documented working-capital position, and a complete, well-labeled virtual data room, which is the model platforms such as Bankerly are built around. Preparation does not eliminate every risk, but it converts many potential retrade triggers into questions that already have answers.

Sources

• BDO - Net Working Capital In Mergers & Acquisitions (M&A)
• Robbins DiMonte - Quality of Earnings and Working Capital Disputes in M&A: What Every Buyer and Seller Should Know
• Kreischer Miller - 5 Reasons Why an M&A Deal May Fail to Close
• Kreischer Miller - The Hidden Deal Risks That Surface During Due Diligence
• FOCUS Investment Banking - The Perils of Customer Concentration in M&A
• FOCUS Investment Banking - Why M&A Deals Fail: Understanding the Challenges