An LOI Is Not a Deal: 4 Ways a Signed LOI Falls Apart

A signed letter of intent (LOI) feels like the finish line. It is not. It is the starting gun on the hardest 60 to 120 days of selling your business. Between 25% and 35% of signed LOIs in the lower middle market never reach closing, and the ways they die are predictable. When I talk to founders who have just signed one, the mood is relief, and that is exactly the wrong posture. This post maps the four failure modes that kill signed deals, the frequency and dollar impact behind each, and the specific moves that reduce every one of them before you ever put a signature on the page.

The gap between "signed" and "closed"

An LOI is mostly non-binding. The price and structure it names are an opening position, not a contract. The only parts that usually bind you are exclusivity (you agree to stop talking to other buyers) and confidentiality. That asymmetry is the whole problem: you give up your bargaining power the moment you sign, and the buyer keeps theirs until the wire hits.

The data on non-closure is sobering. Axial's Dead Deal Reports, which break down anonymized broken LOIs across the lower middle market, put non-closure at roughly 30% in both 2023 and 2024. Cash-strategic deals close at the higher end (around 80% to 85%); SBA-financed acquisitions, the most common structure for DTC and ecommerce brands under $10M, close at the lower end (around 55% to 65%). The mix of causes also shifted. Diligence-related failures climbed while financing failures eased as credit markets loosened.

Four failure modes account for the bulk of dead deals: diligence discoveries that trigger a retrade or a walk, working capital peg mechanics, rep-and-warranty disputes that drag past exclusivity, and buyer financing that evaporates. Here is what each looks like and how to blunt it.

Failure mode	Frequency	Typical financial impact	Key DTC trigger	Pre-LOI prevention
Due diligence / QoE discovery	~37% of broken LOIs (2024)	10-30% price cut, or deal death	Inventory aging; EBITDA add-backs; channel concentration	Sell-side QoE before go-to-market
Working capital peg dispute	Clause in 92% of deals	0.9% avg claim; exceeds 1% in 24% of cases	Inventory mis-valued; AR/AP seasonality	Pre-LOI WC analysis; define the peg in the LOI
Rep & warranty / exclusivity breach	Retrade: 10.8% of broken LOIs (2024)	Deal delay to exclusivity expiry; price concessions	IP ownership gaps; contract assignment failures	Pre-close legal audit; disclose known issues pre-LOI
Buyer financing failure	13.8% of broken LOIs (2024)	Deal death; months of lost exclusivity	SBA underwriting on the same clock as diligence	Vet proof of funds; prefer pre-approved buyers

Failure mode 1: due diligence discoveries that trigger a retrade

Due diligence is now the single largest deal-killer, at about 37% of broken LOIs in 2024, up from roughly 30% the year before. The mechanism is almost always the same: a buyer commissions a quality-of-earnings (QoE) report, and the QoE-adjusted EBITDA comes in below the number you presented. In mid-market deals that gap typically runs 10% to 30%. Apply that to a multiple and a 15% EBITDA haircut can wipe a similar percentage off your headline price.

For DTC and ecommerce brands the specific triggers repeat: add-backs that do not survive scrutiny (the founder's "one-time" agency spend that runs every year), revenue concentration in one channel or one retailer, aging inventory carried at cost it will never fetch, and CAC that has quietly crept up. A buyer who finds any of these has a lever. Inside exclusivity, with other buyers gone, that lever becomes a retrade: a unilateral price cut after the LOI is signed. Retrades hit an estimated 30% to 40% of lower-middle-market deals, and in one documented case a retrade cut enterprise value by 20% and cash at close by 30%.

When I talk to founders going through this, the QoE process is the moment the mood breaks. One described it as "being audited by someone who wants to find reasons to pay less." That is the correct mental model, and it is why the fix is to run your own QoE first (more on that below). The pattern we see again and again is that the founders who disclosed their weak spots up front kept their price, and the ones who hoped the buyer would not notice got chipped.

Failure mode 2: the working capital peg quietly moves money at close

This is the one that surprises operators most, because it happens after everyone has agreed on price. Nearly every deal sets a working capital "peg," a target level of net working capital the business should carry at close, usually based on a trailing 12-month average. If actual working capital at close comes in below the peg, the shortfall is deducted from your proceeds, dollar for dollar. It is a normal, expected mechanic, and it is also the single most common source of post-closing dispute.

The numbers make the exposure concrete. Working capital adjustment clauses appear in 92% of private M&A deals. When there is a dispute, the buyer's calculation is accepted about 70% of the time. The average purchase-price-adjustment claim runs 0.9% of transaction value, and 24% of claims exceed 1%. On a $3M sale, a 0.9% claim is $27,000 removed at close; on a $10M deal it is $90,000. Escrows compound the timing risk: the median general indemnification escrow in these deals is 12.5% of transaction value, and nearly half carry a separate purchase-price-adjustment escrow (median 1.23%).

DTC brands are especially exposed because inventory is the biggest working capital line and it is easy to overstate. Inventory-heavy businesses routinely overstate working capital by 20% to 40% once a buyer normalizes valuation for slow-movers, returns reserves, and in-transit goods. When we've seen this go wrong, it is because nobody modeled the peg before the LOI. One health supplements operator put it plainly: "We argued about the peg for three weeks. It cost us $180K." The fix is unglamorous. Model your own normalized working capital before you sign, and negotiate the peg definition into the LOI itself rather than leaving it to a post-signing true-up you do not control.

Failure mode 3: rep and warranty disputes that push past exclusivity

Representations and warranties are the promises you make in the purchase agreement about the state of the business: that you own your IP, that your contracts are assignable, that your financials are accurate, that there is no undisclosed litigation. Buyers negotiate these hard because they allocate risk. Sellers underestimate how long the negotiation takes, and that is where deals die: the reps drafting drags, the clock runs, and exclusivity expires with no signed agreement.

The exclusivity math is tight. Standard windows for mid-market deals ($2M to $25M) run 45 to 60 days. Legal drafting, disclosure schedules, and rep negotiation routinely eat that whole window on their own, before you account for financing or diligence running in parallel. Representations and warranties insurance (RWI), which shifts rep risk to an insurer, now appears in 63% of private M&A transactions, up from 55% in 2023. But RWI generally only pencils above roughly $10M to $15M in enterprise value, given premiums of 3% to 4% and minimums often near $100,000. Below that, and for most DTC deals, seller indemnification and escrow carry the risk, and median indemnification survival sits around 12 months.

Deal size / buyer type	Typical exclusivity period	Risk level for seller
Sub-$2M / SBA individual buyer	30-45 days	High (SBA underwriting alone takes 30-60 days)
$2M-$25M / PE search fund or add-on	45-60 days	Medium
$25M-$100M / PE platform or strategic	60-90 days	Low to medium
Cross-border or regulated industry	90-180 days	Low (buyer sophistication higher)

The operators who clear this cleanly do the legal audit before go-to-market: confirm IP assignments are signed, check that key contracts survive a change of control, and fix the assignability gaps while there is still time. The ones who do not end up discovering, 40 days into a 60-day window, that a dozen customer contracts need consent to assign, and watching the deal slide toward an extension they did not want to ask for.

Failure mode 4: buyer financing collapses between LOI and close

The last mode is the buyer simply running out of money. Financing failure accounted for 21.3% of broken LOIs in 2023, easing to 13.8% in 2024 as credit loosened. But the risk is not evenly spread. It concentrates in SBA-financed individual buyers, the most common buyer for DTC brands under $10M, and those deals close at only about 60% versus 82% for cash strategic buyers.

The structural problem is the clock. SBA underwriting alone takes 30 to 60 days, which is your entire exclusivity window. So the buyer's financing and your diligence are racing on the same track, and if underwriting stalls (or the lender changes its guidelines mid-process, which happens), the deal can die at day 55 of a 60-day window with nothing to show for it. When I talk to founders who lost a deal this way, the common thread is that they did not realize their LOI was still subject to financing. They read "subject to financing" as boilerplate rather than a live contingency that hands the buyer an exit. Vet proof of funds before you sign. Ask what stage the lender is at. And weigh a slightly lower all-cash offer against a higher SBA-contingent one, because a 60% chance of closing at a higher number is often worth less than an 82% chance at a lower one.

A signed LOI hands all the bargaining power to the buyer and keeps all the risk with you. Every failure mode here is really the same story: the buyer finds a reason to pay less, or cannot pay at all, while you are locked in exclusivity with nowhere to go. The only durable defense is to find your own problems before the buyer does, and price them in before you sign.

Three things to do before you sign the LOI

Every failure mode above is cheaper to prevent than to fix, and all three preventions happen before signing.

First, commission a sell-side quality-of-earnings report. It costs $15,000 to $30,000 and it does two things: it surfaces the EBITDA adjustments a buyer's QoE would find, so you fix or defend them in advance, and it lets you present a number that survives scrutiny. The return is 5 to 10 times the cost in price protection, because a buyer who cannot find a surprise cannot justify a retrade.

Second, model your own working capital and propose the peg. Normalize inventory, reserves, and seasonality yourself, then write a peg definition into the LOI. If you set the terms of the true-up before you sign, you are not litigating it after close when the buyer's calculation wins 70% of the time.

Third, prepare the data room and pre-disclose known issues. Get IP assignments, contract-assignment consents, and clean financials organized before go-to-market, and put your customer concentration and any margin softness on the table early. The pattern we see is that pre-disclosure converts a mid-process retrade lever into a priced-in fact. The founders who disclosed their top-customer exposure before the LOI kept their number; the ones who let the buyer discover it at day 40 did not.

An LOI is not a deal. Treat the signature as the beginning of the work, prepare like the buyer is going to look for reasons to pay less (because they are), and you move your odds of closing from the wrong end of that 25% to 35% failure range toward the right one. Running that pre-LOI preparation is exactly what our interim CFO team does on the sell side.

Sources and methodology

Broken-LOI failure causes come from the Axial Dead Deal Reports (2023 and 2024). These break down anonymized lower-middle-market broken LOIs by cause and buyer type (47 deals in 2023, 65 in 2024). Sample sizes are small and self-reported by deal advisors, and DTC/ecommerce is not isolated as a category, so treat the cause percentages as directional. See the 2024 report and the 2023 report.

Working capital adjustment frequency and claim data come from the SRS Acquiom 2025 Working Capital Purchase Price Adjustment Study. It covers 1,200-plus finalized private-target acquisitions (combined value above $298B) and reports the 92% clause prevalence, 70% buyer-win rate, 0.9% average claim, and the 24%-exceed-1% figure. It does not break out by industry. Summary via Deal Lawyers; escrow medians from the SRS Acquiom Lower Middle Market M&A study.

RWI adoption and indemnification survival come from the ABA 2025 Private Target M&A Deal Points Study. The study reports RWI rising to 63% of private M&A (from 55%) and a median indemnification survival of 12 months. It covers all private M&A and tilts toward larger deals than most DTC transactions. See the ABA summary.

Closure rates by buyer type and the 25-35% non-closure range are composite industry estimates, drawn from Axial and lower-middle-market advisory guides including Acquisition Stars. No single source provides exact figures for all buyer types, so these are directional, not survey-grade.

DTC-specific dollar examples (the 10-30% EBITDA gap, the $250K working capital adjustment, inventory overstatement) are drawn from our own deal work and the Eightx eCommerce Due Diligence Checklist. These are illustrative operator examples, not third-party benchmarks. Retrade impact case data via the Corum Group retrade analysis.

Frequently asked questions

what percentage of signed lois actually close?

In the lower middle market, roughly 65% to 75% of signed LOIs reach closing, which means 25% to 35% die after signing. The rate depends heavily on buyer type: cash strategic buyers close around 82%, while SBA-financed individual buyers close closer to 60%.

what does it mean when a buyer tries to retrade after signing the loi?

A retrade is when the buyer lowers the price or worsens the terms after the LOI is signed, usually citing something they found in diligence. It works because you have already stood down other buyers and you are inside an exclusivity window with no bargaining power. Retrades hit an estimated 30% to 40% of lower-middle-market deals.

what is a working capital peg and how does it affect what i actually receive at closing?

The peg is a target level of working capital the business is expected to have at close, usually set from a trailing average. If actual working capital comes in below the peg, the buyer deducts the shortfall from your proceeds dollar for dollar. For inventory-heavy DTC brands that overstate working capital by 20% to 40%, that true-up can quietly move six figures.

how does a quality of earnings report differ from my normal financial statements?

Your financials show what happened. A quality-of-earnings report tests whether your EBITDA is real and sustainable, stripping out owner add-backs, one-time boosts, and revenue that will not recur. Buyers commission a QoE to find reasons the number is lower than you claim, and the gap between your figure and theirs typically runs 10% to 30% in mid-market deals.

how do i protect myself if the buyer's financing falls through?

Vet the buyer's proof of funds and financing readiness before you sign, prefer buyers who are pre-approved or using their own cash, and understand that a financing contingency means the deal can still collapse. If your buyer is SBA-financed, know that underwriting takes 30 to 60 days, which eats most of your exclusivity window.

do i need representations and warranties insurance for a small dtc deal?

Usually not below about $10M to $15M in enterprise value. RWI premiums run 3% to 4% of the insured amount with minimums often near $100,000, so it rarely pencils on a $2M to $5M deal. RWI appears in fewer than a third of lower-middle-market deals; below that threshold, traditional seller indemnification and escrow do the work.

what happens if due diligence takes longer than my exclusivity period?

Either you grant an extension, often with a concession the buyer asks for, or exclusivity lapses and you regain the right to talk to other buyers. In practice most sellers extend, because restarting a process after months of exclusivity is painful and signals distress. The cleaner fix is to run a tight, pre-organized data room so diligence finishes inside the original window.

what should i disclose before signing an loi to reduce retrade risk?

Disclose the things a buyer will find anyway and use against you: customer concentration, any margin decline, inventory that is aging, contract assignment gaps, and known add-back weaknesses. Surfacing them before the LOI prices them into the headline number instead of handing the buyer a mid-process reason to chip you.