Why Deals Fall Apart Between LOI and Closing

A meaningful share of small business transactions with a signed letter of intent never close, and the causes are consistent enough to plan against. Most failures trace to one of seven problems. Nearly all of them can be identified before the letter of intent is signed, and most can be prevented by preparation on one side or the other.

1. The numbers do not hold up

The most frequent cause is a gap between the earnings presented and the earnings the buyer can verify. Add-backs lack documentation. Internal statements do not match tax returns. Revenue recognized in one period belongs in another.

When verified earnings come in below the figure used to set the price, the buyer asks for a reduction. Some sellers accept. Others take offense, and the deal ends.

Prevention. Reconcile statements to returns and document every adjustment before going to market. On larger transactions, a seller-commissioned earnings review surfaces problems while there is time to correct or disclose them.

2. Performance declines during the process

A sale consumes an owner's attention. Sales calls are postponed, estimates go out late, and problems are left for the next owner. Three months into diligence, trailing results have weakened.

Buyers and lenders both update their analysis with current figures until the day of closing. A decline of even 10 percent can reduce the supportable loan, and with it the price.

Prevention. Run the business as though the sale will not happen. Delegate transaction tasks to advisors wherever possible. The owner's most valuable contribution during diligence is a strong quarter.

3. Financing fails

A buyer's intent to obtain financing is different from a lender's commitment to provide it. Loans fail for several reasons: the buyer's liquidity or credit falls short, the lender's valuation comes in below the price, or the cash flow does not meet the coverage requirement.

SBA rules in effect since October 2026 have tightened two of these tests. Coverage of at least 1.25 times must be shown on historical earnings, and total debt cannot exceed the lender's valuation. A price that depends on projected improvement will not be financed.

Prevention. Sellers should qualify buyers before granting exclusivity. Ask for a lender's prequalification letter and evidence of funds for the equity injection. Buyers should involve a lender before making an offer and should test the price against the lender's coverage math.

4. Surprises in diligence

Undisclosed problems damage a transaction twice. The problem itself has a cost, and its discovery causes the buyer to question everything else.

Typical examples include a pending claim, a tax notice, a key customer who has given notice, an expired license, an environmental condition, and employees classified as contractors.

Prevention. Disclose known issues early, with an explanation and a proposed remedy. Buyers accept imperfections they can evaluate. They walk away from those they find on their own.

5. Third parties do not cooperate

Many closings depend on someone who is not a party to the deal.

• Landlords must consent to assignment or grant a new lease, and some use the opportunity to raise rent or demand a guarantee.
• Franchisors must approve the buyer and may require training, fees and facility upgrades.
• Licensing bodies work on their own timetables.
• Key customers may hold contracts that require consent.

Prevention. Read the lease, the franchise agreement and major contracts before going to market. Know what consents are required and how long they take. Where possible, approach the landlord early.

6. Terms left open in the LOI

Points that were vague in the letter of intent become disputes in the purchase agreement. The usual subjects are working capital, the allocation of the purchase price, the size of the escrow, the limits on indemnification, the scope of the non-compete and the terms of the seller's note.

By the time these arise, the seller has been off the market for weeks, and each side feels the other is changing the deal.

Prevention. Negotiate a detailed LOI. Disagreements are far easier to resolve while several buyers remain interested than during the final month.

7. Fatigue and second thoughts

Transactions that run long tend to fail. Each additional week brings new requests, new costs and new chances for something to go wrong. Relationships wear down.

Sellers also reconsider. An owner who has not thought through life after the sale may find, late in the process, that the idea of leaving is harder than expected. Buyers reconsider too, particularly first-time buyers confronting a personal guarantee.

Prevention. Set a timeline with milestones in the LOI and hold both sides to it. Sellers should settle their own plans, and their family's views, before engaging buyers. Buyers should understand the financial commitments before making an offer.

The role of advisors

Advisors contribute to both success and failure. An attorney who seldom handles acquisitions may negotiate every clause as though it were contested litigation. An accountant unfamiliar with transactions may respond slowly to diligence requests. Counsel with regular experience in deals of similar size knows which points are customary and which merit a fight, and that judgment keeps transactions on schedule.

What the successful ones have in common

Transactions that close share several features. The seller prepared before going to market. The buyer was financially qualified before the LOI. The LOI was specific. Problems were disclosed. Responses were prompt. And someone, usually the intermediary, managed the timeline and kept the parties talking when they disagreed.

None of this guarantees a closing. It does change the odds considerably, and it means that when a transaction fails, it fails early, before either side has spent months and significant fees.

Twelve31 Advisors manages each engagement from preparation through closing, with attention to the points where transactions most often fail.