Why Deals Die Between LOI and Close
Industry data suggests that roughly one-third of signed letters of intent in the lower middle market do not result in a closed transaction. [1] Most reporting on broken deals point to due diligence findings, quality of earnings discrepancies, and other issues that surface after signing as the leading culprits. [2]
That's been true in our experience as well, but we think there's more nuance to it. What we've observed, across every deal that has come to us for rescue or that we've seen break, is this: the failure is almost never a single diligence surprise. Some of the same causes appear again and again, and diligence findings are only one part of the pattern. They are predictable failure modes, and predictable problems have solutions if you see them coming early enough.
The period between a signed letter of intent and a closed transaction is typically 60 to 90 days. It includes due diligence, lender underwriting, legal documentation, seller management, and in some cases regulatory review, all running simultaneously and all with interdependencies.
Sponsors know the LOI is not the finish line, but the next 60 to 90 days still catch many of them off guard. This is the phase where everything assumed at signing gets tested against reality, and reality has a habit of differing from assumptions. The five failure causes below account for the large majority of deals we have seen break down in this window.
The Five Failure Causes
1. Financing Structure Mismatch
There is a structural flaw in the deal.
This is the most common failure and the most preventable. The sponsor builds a financial model, agrees to a price, signs an LOI, and then begins the lender conversation, only to discover that the business's debt service capacity doesn't support the proposed structure at the price they committed to.
Often the cause is a seller note that is not "deep and dark." A seller note has to be structured so that it does not interfere with the rights of the senior lender financing the transaction. A note that sits outside the maturity, is on standby, and carries only paid-in-kind interest does not interfere with the senior lender’s rights, does not allow cash to go out to sub debt and does not affect key financial covenants like the fixed charge coverage ratio ("FCCR").
Another common structural problem is the earnout. An earnout has to pay for itself. If it is simply cash leaving the business without some sort of high hurdle, it will create issues with the FCCR and can lead to insolvency.
2. Working Capital Issue
The quality of earnings sets the peg for working capital, but as closing approaches, the business is falling short.
A seller signs the LOI believing the deal is essentially done. By week four of diligence, the sponsor has identified purchase price adjustments as a result of working capital issues that will change the economics. The seller hears this not as a normal part of the process but as a buyer re-trading the deal.
This divergence is not bad faith. It is a failure of expectation-setting at the LOI stage. Sellers in founder-owned businesses have often never sold a company before. They do not understand the mechanics of diligence, the purpose of working capital adjustments, or the difference between the LOI price and the closing price. If you don't educate them on this before signing, you will be managing a renegotiation that feels adversarial to a party who thought it was a done deal.
3. Diligence Surprises
Revenue quality issues, customer concentration, or management dependency that are not visible at LOI but surface during due diligence.
Sometimes the sponsor "bids the book." It can happen when you get "deal heat" or find yourself in a highly competitive process for an attractive asset. Then the findings arrive. Say the quality of earnings reveals that the majority of the EBITDA is add-backs, and many of them are not legitimate. Or the largest customer, representing 30 percent of revenue, is up for contract renewal in six months. Or the founder is the primary relationship with every key account, and there is no second layer of management.
These problems are very common in the lower middle market, and the numbers back that up. [2] The problem is not that these issues exist. It is that most sponsors do not uncover them until they are three weeks into a 60-day exclusivity window, at which point the options are limited and the clock is running.
Preliminary diligence conversations with the seller before the LOI, with targeted questions about EBITDA composition, customer relationships, and management depth, surface most of these issues early enough to either address them in the deal structure or make an informed decision not to proceed.
4. Lender Internal Challenges
A lender issues a term sheet and then withdraws or materially changes terms after the process has begun.
Internal challenges happen more often than sponsors expect, and for a range of reasons: the lender's portfolio concentration changes, credit committee reviews the deal differently from the relationship manager, market conditions shift between term sheet and commitment, or the credit memo that reaches committee looks different from the preliminary materials the lender reviewed.
The main thing that wins the day is the "juice" of the person advocating for the deal inside the lender. When that person is new at the institution or not very senior, they will have difficulty overcoming internal challenges in the process. Finding the right person at a lender is just as important as finding the right lender.
5. The Deal Drags and the Seller Loses Patience
The deal simply runs out of clock.
In the lower middle market, sellers and their brokers, most of whom are operating on a real estate license, have a difficult time surviving real professional due diligence. On top of that, lenders ask a lot of questions, and getting term sheets takes longer than anticipated.
In our experience, sellers who have never sold a company before get a lot of deal fatigue and cannot understand the need for the data being requested. To them, it looks simple. That leads to a lack of patience and, unfortunately, at a certain point they stop providing the information needed to get the deal done, and the deal dies.
Practical Advice to Mitigate Potential Issues
At Halifax West, we are often called into deals that are broken, and we find a way to rescue them. We built a broken deal rescue capability because we kept seeing the same failure causes appear in deals that sponsors brought to us mid-process. Some of those deals were rescuable. Some were not.
The better outcome is never needing the rescue. Most of these causes can be addressed before the LOI is signed, while you still have leverage and time. Here is where we would start.
Test the structure with lenders first. Before the LOI is signed and before exclusivity begins, have a substantive conversation with two or three lenders who know the sector, with enough information for them to give a credible preliminary reaction.
Set seller expectations before signing. Walk the seller through how diligence works, what a working capital adjustment is, and why the closing price can differ from the LOI price. A seller who hears it at the LOI stage sees a process. A seller who hears it in week four sees a re-trade.
Have diligence conversations early. Ask hard questions about EBITDA, customers, and management while you can still change the price or walk away.
Know who is carrying your deal at the lender. Find out who will present it to the credit committee and how much standing that person has. Keep a backup lender relationship in parallel, so that a pullback does not end the deal.
Manage the clock from day one. Build a master calendar with milestone dates for every workstream, watch the interdependencies, and talk with the seller about timing well before exclusivity expires. Keep them informed so that fatigue does not turn into silence.
Before signing your next LOI, pay attention to these five failure causes. Which of these causes is most likely given what you know about the business, the seller, and the lending environment? Then manage against it, proactively, before it becomes a crisis.
About the Author
Ramesh Swamy is the founder of Halifax West, a merchant bank for independent sponsors and private companies in the lower middle market. Halifax West's buyside advisory practice includes broken deal rescue, LOI structuring, credit memo creation, and capital solutions, designed to give sponsors the institutional depth to navigate every stage of the acquisition process.
Sources & References
[1] Acquisition Stars, M&A Valuation Trends & Statistics 2026
This article is for informational purposes only and does not constitute investment, legal, or financial advice. Halifax West provides advisory and capital solutions services to qualified clients.
