Why Business Deals Fall Apart After the Handshake

In 2025, the most common reason a signed business deal fell apart had nothing to do with financing or a buyer's change of heart. In its 2025 dead-deal report, the deal platform Axial examined 75 transactions that broke after a signed letter of intent and found that diligence findings outside the formal earnings review caused 25.3% of the failures, up from 19.1% in 2023. Bad earnings numbers came second, at 21.3%.

Put those two together and almost half of the broken deals in the study died because of what buyers found once they looked inside the business. The finding suggests diligence is less a formality that follows the real agreement than the stage where the agreement actually gets tested.

The timing raises the stakes. In its coverage of the small-business wealth transfer, Fortune reported a McKinsey Institute for Economic Mobility estimate that about 6 million small and midsize businesses will face an ownership transition by 2035, representing up to $5 trillion in enterprise value. Millions of owners will try to sell. Many of them will sign a letter of intent and assume the hard part is over.

A Signed Letter Is Not a Sale

A letter of intent, usually shortened to LOI, is the handshake on paper. It sets out a proposed price and structure and typically gives the buyer a window of exclusive access to examine the business before anyone signs a binding purchase agreement. For the seller, it feels like the finish line.

It is closer to the starting gun. The price in an LOI rests on what the seller has reported, from the profit figures in the listing to the inventory value on the balance sheet. Due diligence is where those reports get tested against what is actually happening on the shop floor, in the stockroom and in the customer list.

When the two do not match, one of three things happens: the deal closes as planned anyway, the buyer comes back with a lower number and a list of reasons, or the deal falls apart. Only one is good news.

The Numbers Behind Broken Deals

The Axial findings point to a shift in where deals break. According to the report, the issues that surfaced outside the formal earnings review included undisclosed legal or compliance risks, customer concentration concerns and contract issues, the kind of problems that appear only when someone reads the contracts and talks to the customers. None of those show up on a profit-and-loss statement. All of them can change what a business is worth.

Size matters too. James Parker, the 2026 chairman of the International Business Brokers Association, described a split market in the group's second-quarter Market Pulse highlights: "Above $2 million, strong businesses are still drawing meaningful competition. At the smallest end of the market, however, buyers have more leverage and are more sensitive to financing, margins, and operating risk."

Operating risk is the key phrase. A small business often runs on the habits, memory and relationships of one owner who has done the job for decades and never needed to write any of it down. Habits are hard to audit.

Where Operational Problems Hide

Financial statements show what a business earned. They rarely show how it earned it, or whether it can keep doing so under a new owner. The operational problems that change a price tend to sit in a handful of predictable places. Four stand out.

Inventory is the first. A balance sheet records what parts and products cost when they were bought, not what they would sell for today. An inventory aging report, which shows when each item last sold, tells a different story, and stock that has not moved in a year or more can be worth far less than its book value.

Labor is the second. In any business that bills for hours, such as a repair shop or a service department, the hours employees are paid for and the hours actually billed to customers can drift far apart. The buyer inherits that gap on day one.

Systems and people come next. If the business software that tracks stock, work orders and invoices does not match what is physically on the shelves, every report built on that software becomes suspect. And if the best customers call one long-time employee's personal phone rather than the main line, part of the business's value walks out the door when that person does.

A Hypothetical Example

Consider a hypothetical lawn-equipment dealership listed at $1.35 million, with $410,000 of that price resting on parts and equipment inventory that the owner has carried at cost for years. The buyer signs an LOI. Then the counting starts.

In this example, the count finds $163,000 in parts that have not sold in two years, and a liquidator offers 11 cents on the dollar for them. That turns roughly $145,000 of book value into scrap. The service department pays three technicians for 120 hours a week but bills only 71, and at a $95 labor rate, the 49-hour gap is about $233,000 of paid time that never reaches an invoice over a 50-week year.

The earnings review adds one more problem. A $38,000 "one-time" repair appears in each of the last three years. It is not one-time at all. At the roughly 3.3 times earnings built into the original price, that recurring cost alone removes about $125,000 of value, since the same multiple applies to every dollar of earnings the business no longer has.

Add the inventory write-down and the recurring repair together, before anyone even puts a price on the labor gap, and the hypothetical buyer's fair price drops by about $270,000, to $1.08 million. Few sellers accept a cut like that. That is how a signed letter becomes a broken deal.

Checking the Operations Before the Price

Nothing in that example needs a forensic accountant. It takes someone looking in the right places early, ideally in the first two weeks of the exclusivity window rather than the last, when the buyer's lender and lawyers are already waiting on a final number.

Buyers split that work in different ways. Some do the counting themselves, and many lean on the accountant who prepares the quality-of-earnings report for the profit side. In dealerships, where much of the value sits in the parts room and the service bays, the operations side can get its own operational due diligence review, which ages the inventory part by part, compares technician hours paid with hours billed and checks whether the dealer management system's reports match what is actually on the shelves.

Sellers can run the same checks on themselves before listing. Writing down obsolete stock, measuring billed hours and moving key customer relationships onto the company's own phone line all cost little, and they remove problems before a buyer finds them.

The Financing Factor

The stakes are higher because so many of these purchases run on government-backed debt. The U.S. Small Business Administration guaranteed 77,600 7(a) loans worth $37 billion in fiscal 2025, part of what the agency called the most capital it had ever delivered to small businesses.

Business purchases are a large share of that lending. In the first half of fiscal 2026, change-of-ownership loans accounted for 3,043 of 26,467 approved 7(a) loans, but $3.6 billion of the $14.2 billion lent, or 25.4% of 7(a) dollars, according to the Coleman Report. In other words, acquisition loans made up about 11.5% of approvals but a quarter of the money. When diligence misses something, the buyer is the one carrying that debt.

Why Selling Is So Hard

Few small businesses change hands at all. According to the same McKinsey research reported by Fortune, 92% of small-business market exits happen through closure, only 5% are completed as sales and 3% are transferred to new owners. Every deal that dies after an LOI sends one more owner back to the start.

The report's authors blamed a mismatched support system. Ken Yearwood, Nathan Marks, Shelley Stewart III and Nick Noel of the McKinsey Institute for Economic Mobility wrote, "Buying and selling a small business is often harder than starting one because the systems that support entrepreneurship in the United States are currently built for founding companies, not transferring them."

Final Thoughts

A letter of intent is a promise to look, not a promise to buy. The deals that survive the diligence window are usually the ones where the operations match the paperwork, and where buyer and seller find the gaps early enough to price them instead of fighting over them. Surprises kill deals.

With millions of businesses expected to change hands over the next decade, the gap between a signed letter and a closed sale will matter to far more people than bankers and brokers. Employees will feel it. It will decide which family businesses carry on under new owners, and which ones quietly close.