A signed LOI does not eliminate the risk of a failed transaction. It records the commercial framework, but the deal can still change when diligence tests the assumptions behind the price, payment structure, working capital, transaction scope, or financing.
The response should follow the issue. A lower earnings figure may affect valuation. A working-capital shortfall may affect closing proceeds. A contract problem may require consent or a closing condition. A lender reducing its loan amount may require more buyer equity without changing the purchase price. Treating every finding as a price cut is usually the wrong starting point.
How a change in adjusted EBITDA can affect the transaction
Consider a hypothetical company marketed at $1.2 million of adjusted EBITDA. A buyer signs an LOI stating a $6 million purchase price before the agreed closing adjustments, equivalent to 5.0x adjusted EBITDA.
During financial diligence, which may include a third-party quality-of-earnings review, the buyer concludes that $150,000 of the proposed adjustments should not be included. The buyer now views adjusted EBITDA as $1.05 million. If the buyer continues to apply the same 5.0x multiple, it may propose a revised purchase price of $5.25 million before the agreed closing adjustments.
A lower figure from financial diligence does not automatically set a new purchase price. The seller may show that an expense was nonrecurring, that the adjustment is supported by the underlying records, or that the cost will not continue after closing. The buyer may reach a different conclusion if the expense is recurring or if the owner’s responsibilities must be replaced. The first task is to determine whether the earnings figure used to set the original price should be revised and, if so, by how much.
The lender will also reassess the transaction using the revised earnings and cash flow. Lower earnings can reduce projected debt-service coverage and may lead the lender to reduce the loan amount, require additional buyer equity, or modify other credit terms. A change in loan proceeds is not an additional deduction from the purchase price. It affects how the buyer funds the acquisition unless the parties agree to revise the transaction structure.
The working-capital adjustment is a separate calculation. Assume the parties determine that the normalized net working-capital target should be $250,000 higher than the amount the seller expected to deliver. Under a typical dollar-for-dollar adjustment mechanism, a shortfall below the agreed target would reduce the seller’s closing proceeds by the amount of the shortfall. That adjustment does not change the EBITDA multiple. It compares the working capital delivered at closing with the agreed target.
Before renegotiating the transaction, identify which assumption changed, the evidence for that conclusion, and the specific term affected.
Axial’s failed-deal samples point to a shift toward diligence issues
Axial reviewed 75 transactions sourced through its platform that reached a signed LOI in 2025 and did not close. Because the sample includes failed transactions only, it cannot be used to estimate the probability that a signed LOI will fail. Axial notes that identifying one definitive cause is often difficult; its analysis assigns a primary reason to each unsuccessful transaction.
Diligence findings outside the quality-of-earnings review accounted for 25.3% of the 2025 sample. EBITDA discrepancies identified during QoE accounted for another 21.3%. Together, those two categories represented 46.6% of the failed LOIs in the dataset.
Why 75 signed LOIs in Axial's 2025 sample failed to close
Primary reason identified for each unsuccessful transaction.
Axial's year-over-year comparison adds context. From 2023 to 2025, non-QoE diligence findings increased from 19.1% to 25.3%, QoE EBITDA discrepancies increased from 10.6% to 21.3%, and financing-related failures declined from 21.3% to 10.7%.
How three reported causes changed from 2023 to 2025
Share of failed Axial-sourced LOIs attributed primarily to each category.
Axial’s examples show how different issues can lead to the same outcome. The report cites a transaction in which EBITDA had been overstated by 25%, another in which 40% of revenue came from one government program, a case involving undisclosed criminal charges, and a contract issue that caused a lender to discontinue its underwriting.
The practical lesson is that different findings affect different parts of a transaction. An earnings discrepancy may affect valuation. A working-capital issue may affect the closing calculation. A contract problem may require consent or a closing condition. A quantified liability may call for a specific indemnity or holdback. A funding issue may require additional buyer equity, alternative financing, or more time.
Match the response to the diligence finding
When diligence identifies a discrepancy or a new risk, start with four questions: What changed? Is the issue temporary or recurring? Was it already reflected in the offer? Can it be addressed directly? A purchase-price adjustment may be appropriate, but it is not the default response to every finding.
The response should address the specific economic or legal effect of the finding.
Six assumptions that deserve early testing
Before signing the LOI, identify the assumptions that could materially affect valuation, structure, or closing certainty. Do not try to complete diligence early. Determine which facts the offer depends on and which evidence will be needed after signing.
Does the earnings figure reflect the business a buyer will own?
A buyer will test revenue recognition, gross margins, payroll, owner compensation, one-time expenses, related-party transactions, and proposed add-backs. The relevant question is not simply whether an expense disappears. It is whether the buyer will incur a replacement cost or another recurring expense after closing.
How much operating capital does the business require?
Historical averages are a starting point, not the answer in every business. Seasonality, growth, billing practices, inventory levels, customer deposits, deferred revenue, and unusual balances can change the appropriate target. The parties also need a clear definition of the accounts included and the accounting policies used.
Which revenue is likely to continue under new ownership?
Customer concentration is only one part of the analysis. Buyers also examine customer-level margins, relationship tenure, renewal and termination rights, pricing history, backlog quality, the number of relationship points, and whether a contract requires consent to assignment or contains a change-of-control provision.
What work must transfer, and what must be replaced?
Sales, estimating, pricing, scheduling, vendor management, hiring, quality control, licensing, and customer escalation may still depend on the owner or another key person. Buyers need to determine which responsibilities can transfer to the existing team and which require a new hire, retention arrangement, or transition period.
Will the buyer receive the assets and rights required to operate the business?
In an asset transaction, a material asset may be used by the business but owned personally or by another entity. Contracts, permits, licenses, marketplace accounts, domains, phone numbers, software, vehicles, and intellectual property may also require consent or may not transfer in the expected manner.
What has been reviewed, and what remains conditional?
The seller does not need a line-by-line breakdown of every funding source, but should understand whether the transaction remains subject to lender underwriting, investor commitments, internal approval, or material third-party consents. The proposed timeline should be consistent with those steps.
What belongs in the LOI, diligence, and purchase agreement
Use each stage for a different job. The LOI records the commercial framework. Diligence tests the facts behind it. The purchase agreement sets the final economics, obligations, and allocation of risk. Trying to complete diligence in the LOI is impractical; leaving known material terms undefined creates avoidable renegotiation.
Establish the framework
- Transaction structure and scope
- Adjusted EBITDA or another valuation basis, when material to the offer
- Purchase price and payment terms
- Working-capital framework and closing adjustments
- Material conditions, timing, and transition
Test the assumptions
- Financial diligence, including any quality-of-earnings review and proposed adjustments
- Working-capital needs and cash conversion
- Customers, contracts, assets, licenses, and transferability
- Legal, tax, employment, compliance, and operational matters
- Buyer funding, approvals, and required consents
Define the final deal
- Purchase price, consideration, and adjustment mechanics as finally agreed
- Working-capital, cash, debt, and expense calculations
- Representations, warranties, covenants, and closing conditions
- Indemnities, escrows, holdbacks, and dispute procedures
- Transition obligations and other post-closing terms
How diligence findings can affect SBA-backed acquisition financing
SBA 7(a) loans may be used for complete or partial changes of ownership, and the maximum amount for an individual 7(a) loan is $5 million. The borrower must be creditworthy and demonstrate a reasonable ability to repay, and the application is made through a participating lender rather than directly through the SBA. Most 7(a) term loans are repaid from the cash flow of the business.
Because repayment depends on the business’s cash flow, lower verified earnings, owner-replacement costs, higher working-capital needs, or material customer concentration can affect how a lender views repayment capacity. Before accepting an LOI that depends on acquisition debt, ask whether a lender has reviewed the transaction, which financial information it has received, how much buyer equity is expected, and which approvals remain outstanding.
Good preparation makes disagreements easier to resolve
No process can eliminate transaction risk. A customer may leave, operating performance may change, a legal issue may be discovered, or a financing source may revise its terms.
Preparation can reduce the disagreements caused by unclear assumptions. Buyers should state the material facts and calculations behind their offers. Sellers should understand the earnings adjustments, working-capital position, customer and contract risks, owner dependencies, and transfer requirements presented to the market. Both sides should distinguish agreed terms from conditions that remain open.
The objective is not a longer LOI or a larger data room. It is a transaction in which the important numbers are defined, the remaining questions are visible, and each diligence finding is addressed according to its actual effect on the deal.
Sources
Axial
Dead Deal Report: Unpacking 2025's Broken LOIs
Used for the 2023 through 2025 failed-LOI data, category definitions, and transaction examples.
BDO
Net Working Capital in Mergers & Acquisitions
Used for working-capital targets, timing, account definitions, and dollar-for-dollar closing adjustments.
DLA Piper
Letters of Intent for Buying or Selling a Business
Used for the role of the LOI, principal commercial terms, closing conditions, and matters left for final agreements.
RSM
Issues in Negotiating Cash-Free Debt-Free Deals (PDF)
Used for cash-free, debt-free mechanics and the treatment of customer deposits, accrued bonuses, transaction expenses, and other debt-like items.
Mintz
Seller Considerations When Negotiating a Letter of Intent
Used for seller-focused LOI considerations, payment structure, working capital, financing, exclusivity, and binding provisions.
U.S. Small Business Administration
Used for eligible ownership changes, the $5 million individual loan limit, repayment ability, lender application process, and repayment from business cash flow.
SMB Law Group
Main Street Deals: How to Structure a Winning LOI for Small Business Acquisitions
Used for the SMB-specific discussion of LOI purpose, transaction scope, seller notes, and cash-free, debt-free terms. The linked episode page includes Apple and Spotify options.
This article provides general information and does not constitute legal, tax, accounting, financing, or valuation advice. Transaction terms and legal obligations depend on the facts and governing documents.
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