Why LOIs Fall Apart (And How to Prevent It)
You've signed a letter of intent. The buyer seems committed. You've announced it to key employees. Then the deal falls apart. Research suggests 30-50% of signed LOIs never close. Here's why deals die between LOI and close—and how to prevent it from happening to you.
Key Takeaways
- •Most LOI failures happen due to issues that could have been addressed before signing
- •The three main causes: due diligence surprises, financing failures, and trust erosion
- •Seller preparation before LOI dramatically increases closing probability
- •Understanding the buyer's perspective helps you avoid deal-killing mistakes
Signing an LOI feels like the finish line. You've found a buyer, agreed on price, and shaken hands. But LOI signing is just the beginning of the real process. Due diligence, legal negotiations, and financing all create opportunities for deals to collapse.
Understanding why deals fail helps you prevent failure. Here are the most common reasons LOIs don't make it to close—and what you can do about each.
Due Diligence Surprises
Hidden problems discovered during review
Financing Failures
Buyer can't secure required capital
Trust Erosion
Questions about business or management
Reason 1: Due Diligence Surprises
The most common deal-killer: the buyer finds something in due diligence they didn't expect. It might not even be material—but if they feel misled, trust erodes.
Common Due Diligence Surprises
- Financial statement adjustments: EBITDA adjustments don't hold up to scrutiny
- Customer concentration higher than disclosed: Revenue more dependent on key accounts
- Undisclosed liabilities: Pending lawsuits, tax issues, or environmental problems
- Employee issues: Key employee departure risk, compliance problems
- Contract problems: Unfavorable terms, change-of-control provisions
- Working capital different than expected: Seasonal patterns or aging issues
The Trust Factor
A discovery in due diligence that should have been disclosed earlier is worse than the issue itself. Buyers assume that if you hid one thing, you're hiding others. Trust erodes, and they start looking for more problems.
Prevention Strategy
- Conduct sell-side due diligence before going to market
- Prepare a comprehensive data room with all material information
- Disclose known issues upfront—before LOI if possible
- Have your own quality of earnings done to anticipate adjustments
Reason 2: Quality of Earnings Adjustments
The buyer's accountants calculate EBITDA differently than you do. Their adjustments reduce the number you based the LOI valuation on. Now there's a gap.
Common QoE Adjustments
| Seller Position | Buyer Adjustment |
|---|---|
| Add-back for above-market owner salary | Reduce add-back—replacement cost higher |
| Add-back for "one-time" expenses | Reject—expenses recur every year |
| No adjustment for owner perks | Add back deferred maintenance, understaffing |
| Revenue timing as recorded | Normalize for proper revenue recognition |
Prevention Strategy
- Have your own pre-sale QoE done before LOI
- Present conservative EBITDA adjustments with strong support
- Anticipate buyer adjustments and have responses ready
- Build adjustment headroom into your price expectations
Reason 3: Buyer Financing Falls Through
The buyer committed to a price they expected to finance. When lenders look at the deal, they offer less—or decline entirely. Now the buyer can't fund the transaction.
Why Financing Fails
- EBITDA adjustments: Banks lend on bank-calculated EBITDA, which is usually lower
- Customer concentration: Lenders penalize key account dependency
- Industry risk: Some industries face tighter lending standards
- Market conditions: Credit tightening during economic uncertainty
- Buyer qualifications: Buyer's personal finances don't support the loan
- Collateral gaps: Asset values don't support loan amount
Prevention Strategy
- Verify buyer financing capacity before signing LOI
- Prefer buyers with committed financing or cash
- Include financing contingency deadline in LOI
- Consider seller financing to bridge gaps (with appropriate security)
The Financing Verification
Ask for proof of funds or a lender commitment letter before signing the LOI. Cash buyers should show bank statements. Financed buyers should have at least a preliminary commitment based on the deal terms.
Reason 4: Working Capital Disputes
The LOI says the buyer gets "normal working capital." But "normal" is undefined. At closing, there's a dispute over how much cash you're supposed to leave in the business.
How Working Capital Disputes Develop
- LOI uses vague language like "adequate" or "normal" working capital
- No agreed-upon calculation methodology
- Seasonal businesses have widely varying working capital
- Buyer expects more cash; seller expects to take more out
Prevention Strategy
- Define working capital calculation methodology in the LOI
- Agree on a target working capital amount based on historical average
- Specify which accounts are included/excluded
- Address seasonal adjustments if applicable
Working Capital Best Practice
Target: Average of trailing 12 months working capital
Calculation: Current assets minus current liabilities (excluding debt)
Adjustment: Dollar-for-dollar adjustment to purchase price for variance
Collar: Often a 5-10% collar before adjustments apply
Reason 5: Legal Documentation Battles
The LOI sets the deal framework. But the definitive agreement fills in hundreds of details. Disputes over representations, warranties, indemnities, and escrows can kill deals.
Common Legal Sticking Points
- Indemnification scope: How much liability does seller retain post-close?
- Escrow terms: Amount, duration, and release conditions
- Representations and warranties: What seller promises about the business
- Non-compete terms: Duration and geographic scope
- Earn-out mechanics: If earn-out exists, how is it calculated?
- Material adverse change clause: What allows buyer to walk?
Prevention Strategy
- Address major legal terms in the LOI, not just price
- Use experienced M&A counsel who knows market terms
- Don't fight every point—pick battles strategically
- Keep perspective on deal value vs. indemnity risk
Reason 6: Trust Erosion During the Process
M&A processes are stressful. Buyer and seller interactions during due diligence can build or destroy trust. Sometimes deals die because relationships deteriorate.
Trust Killers
- Slow document production: Appears like hiding something
- Defensive responses: Getting upset at legitimate questions
- Changing stories: Inconsistent answers to different people
- New requests: Asking for changes after terms are agreed
- Personality conflicts: Seller and buyer can't get along
- Advisor conflicts: Lawyers or bankers creating unnecessary friction
Prevention Strategy
- Prepare your data room before going to market
- Respond to requests promptly and completely
- Brief your team on consistent messaging
- Let advisors handle confrontational issues
- Remember you may be working with this buyer post-close
The Human Factor
Buyers are buying a business, but they're also buying a relationship (during transition) and trusting your representations. If they don't like or trust you, they'll find reasons to walk.
Reason 7: Seller's Remorse
Sometimes it's not the buyer who kills the deal. Sellers get cold feet—especially as the reality of no longer owning their business becomes concrete.
Seller's Remorse Triggers
- Realizing what life looks like without the business
- Concern about employees or legacy after sale
- Second-guessing the valuation as due diligence progresses
- Family members raising objections late in the process
- Fear of post-sale restrictions (non-competes)
Prevention Strategy
- Work through emotional readiness before going to market
- Align with family and partners before the process starts
- Have a clear post-sale plan (what you'll do next)
- Remember why you decided to sell in the first place
Protecting Yourself in the LOI
Key LOI Terms to Include
- Exclusivity period: 60-90 days maximum; extensions require mutual agreement
- Financing contingency deadline: Require committed financing by specific date
- Due diligence scope: Define what they can and can't investigate
- Deposit/break fee: Consider requiring a deposit that's forfeited if buyer walks
- Working capital definition: Methodology and target amount
- Major legal terms: Indemnification caps, escrow amounts, survival periods
The Comprehensive LOI
A more detailed LOI takes longer to negotiate but reduces surprises later. The issues you resolve now won't kill the deal during documentation. The tradeoff: less flexibility to adjust as due diligence reveals new information.
Preparing for a Successful Exit?
Eagle Rock CFO helps businesses prepare for M&A transactions with sell-side due diligence, quality of earnings preparation, and deal support. We help you avoid the surprises that kill deals.
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