Why Middle-Market Deals Fail After the Term Sheet

In my years as an M&A attorney working with lower middle-market founders and investors, I’ve watched transactions unravel not on valuation, but on what comes after the term sheet is signed.

The letter of intent (LOI) creates a moment of mutual optimism. Both sides agree, at least in principle, on what the business is worth and what a deal could look like. Then reality sets in.

I’m currently working through a transaction that was supposed to close in January. It’s now March, and we’re finally approaching the finish line after nine months of work and two months of delays. The seller is a first-time owner: smart, talented, but unversed in the demands of institutional buyers. The buyer is private equity–backed and highly sophisticated. The deal is surviving only because both parties genuinely like each other and the opportunity is compelling. Most deals don’t have that safety net.

For founders thinking about a transaction in the next few years, understanding why deals break down (and what you can do now to prevent it) can be the difference between closing and walking away empty-handed.

The Term Sheet Is Basically a Wish

The term sheet captures what both parties believe the business could be worth. But that belief gets stress-tested during due diligence, and stress tests have a way of finding cracks.

Several things can break down once that process begins. Does the data hold up to verification? Is the risk profile what the buyer assumed? Are the financials accurately represented?

Sometimes, the answer to these questions is “no.” I’ve had a staffing company deal collapse when employment files revealed the workforce wasn’t accurately documented. Another $25 million company nearly lost its transaction when we discovered that ten key contracts—the ones that drove the entire business—lacked assignment provisions. We overcame it, but it cost everyone time, money, and trust.

Due diligence is where a transaction earns its price. If what’s under the hood doesn’t match the brochure, the deal reprices—or dies.

The Five Most Common Post-LOI Breakdowns

In my experience, post-LOI failures tend to cluster around five recurring problems.

1. EBITDA Analysis that Doesn’t Hold up

This is the most common. Once buyers start digging into owner compensation, onetime expenses, and customer churn patterns, the economics often don’t support the original valuation. Add-backs that seemed reasonable start looking aggressive. Revenue that looked recurring turns out not to be. The buyer’s confidence in the deal’s economics erodes.

2. Due Diligence Surprises Unrelated to Money

IP ownership disputes. Employment classification problems. Regulatory exposure. Key contracts without assignment provisions. These aren’t financial issues per se, but they create real risk, and sophisticated buyers price risk heavily.

3. Financing Fragility

Markets have been volatile, and lender underwriting has tightened over the past two years. Deals that would have cleared credit committees without issue a few years ago are being turned down today. This is largely outside a seller’s control, but it’s a real risk in the current environment.

4. Re-Trades and Deal Fatigue 

Everyone knows the saying, “time kills all deals.” As negotiations drag on, trust can erode. The more we have to spend in the weeds, the more buyers grow weary. Sellers start questioning the whole endeavor. Small issues become large ones because everyone is tired. I had one transaction where the seller, after months of exhaustive work and everyone ready to close, simply pulled out, choosing to take the financial hit rather than finish the deal.

5. Seller Unpreparedness

This may be the most fixable problem on the list. First-time sellers often don’t know what they don’t know. They’re still running their businesses flat-out, haven’t built the right advisory team, and haven’t thought through what the process will actually require of them. The emotional weight is also significant. Selling a company you’ve built over decades is not a purely financial transaction. When the anxiety mounts and the surprises pile up, sellers sometimes just walk.

Why the Middle Market Is Especially Vulnerable

On the buy side, you typically have private equity-backed or venture-backed acquirers with institutional processes, GAAP-level financial expectations, and experienced deal teams who operate with what I’d describe as “clarity and vigor.” They’ve done this dozens of times. They know exactly what they want, and they know what good looks like.

On the sell side, you often have founder-led businesses that have operated informally for years. The founder is the business in many ways: they are the owner of the relationships, the technical knowledge, the institutional memory. Their philosophy has been, understandably, “we’ll figure it out when we get there.”

What happens when those two cultures collide under the pressure of a transaction? Expensive, time-consuming friction.

In the deal I’ve been working on for nine months, the buyer’s documents are on the aggressive end of what I normally see, and they’ve gone entirely over my sellers’ heads. My job is to make sure that the sellers understand what they’re agreeing to, and that they’re able to achieve the metrics needed to obtain the balance of the purchase price. For business owners who have never gone through the process before, it’s a bit like drinking from a fire hose.

What Middle-Market Companies Can Do Now

The good news: most of the deal-killers I’ve described are preventable with preparation that begins well before any buyer conversation.

I think about this the way Stephen Covey framed it: begin with the end in mind. If you know you’re going to sell to an institutional buyer, start running your company as if that day is already here.

Specifically:

• Maintain clean, high-level financials that don’t require heroic reconstruction before a sale process.
• Make sure your contracts are clearly assignable, properly documented, and professionally drafted.
• Lock down your intellectual property. If your IP is in anyone’s head or loosely documented, fix that now.
• Get your most important employees under contract. Buyers want to know who’s staying and what holds them.
• Clean up governance. Know your numbers intimately. Don’t wait to be asked.

One of my clients recently did something I deeply respect: they were preparing to go to market, ran their own Quality of Earnings analysis, and found holes in their valuation story. Instead of pressing forward, they pulled back. They’re taking 12 to 18 months to close those gaps, rebuild their advisory team, and re-enter the market with a cleaner story and more defensible numbers. That discipline is rare, and it will pay off.

What Founders Should Do a Year Before Going to Market

If you’re 12 months out from a potential transaction, here’s what I’d focus on:

• Restate your financials on a GAAP basis. The deal I referenced earlier required a three-year restatement from cash to accrual. That work was done under deal pressure, which is the worst time to do it. If you’re running on a cash basis, start the conversion now.
• Make yourself replaceable. If you are the business—if the relationships, knowledge, and operations flow through you—buyers will be nervous. They’ll require you to stay through earnout periods or will discount the price to reflect key-person risk.
• Do a comprehensive cleanup of your operations. Nine months into this deal, we discovered unfiled sales tax returns in several states. In a stock purchase, that’s the buyer’s problem after close, which means it’s now a negotiating point, a source of tension, and another reason the timeline extends. These things are findable and fixable now, before they become leverage against you.
• Vet your assumptions with outside eyes. Your revenue projections and growth thesis will be challenged. Bring in a third party before the buyer does. Find the weaknesses in your story yourself, so you can shore them up or at least explain them clearly.
• Build your deal team early. That team should include an experienced M&A attorney, a quality-of-earnings advisor, and ideally an investment banker who knows your space. Sellers who try to keep the team small to save on fees almost always spend more in the end in time, transaction costs, and sometimes lost deal value.

The Goal: Be the Best Horse at the Show

What I mean is this: when you come to market, you want to be the company that moves faster, creates less risk, and commands a better multiple. You want buyers competing for you, not renegotiating because of surprises they found in diligence.

That status is earned through years of disciplined preparation, not weeks of scrambling before a sale process. The founders who close the best deals are the ones who started thinking about the exit before it was urgent.

And always remember: time kills all deals. The longer a transaction takes, the more chances it has to fall apart. The best thing you can do for your deal is to make the diligence clean, keep momentum, and give both sides a reason to believe.

Nancy Stabell is the founder and lead attorney of Wood Stabell Law Group, a Nashville-based firm known for bringing business sense to the practice of law. With more than 20 years of experience in corporate, real estate, and M&A work, she helps entrepreneurs and investors structure deals that drive growth and protect value. She also is a member of ACG Tennessee.

Middle Market Growth is produced by the Association for Corporate Growth. To learn more about the organization and how to become a member, visit www.acg.org.