A signed letter of intent feels like the finish line. For roughly a third of lower-middle-market transactions, it is the last good day of the deal.
Why deals fail in due diligence comes down to one thing more than any other: the numbers the buyer priced the deal on do not survive inspection. In Axial’s 2025 Dead Deal Report, 46.6% of collapsed LOIs died on what diligence found — or failed to find.
Why Deals Fail in Due Diligence: The Short Answer
Deals fail in due diligence because verification changes the facts the price was built on. Axial’s 2025 Dead Deal Report, which analysed 75 unsuccessful transactions across eight firm types and eight industries, found that 25.3% of broken LOIs died on non-QoE diligence findings and a further 21.3% on quality-of-earnings EBITDA discrepancies.
Combined, that is 46.6% — near enough one in two dead deals traceable to the diligence phase itself. Not to valuation disagreements at the outset, and not to a buyer who lost interest. To something that surfaced once the data room opened.
Two things are worth noticing. First, the top two categories are both verification failures, and they are the two largest by a clear margin. Second, renegotiation at 14.7% is rarely a standalone cause — a buyer reopens price because diligence gave them a reason to. Counted honestly, the diligence phase is implicated in well over half the sample.
The Bottleneck Moved: Financing Out, Diligence In
The single most useful trend in this data is that the cause of failure has migrated. Axial reports that financing-related failures fell from 21.3% in 2023 to 10.7% in 2025 — roughly halving in two years — while diligence-driven failures moved the other way.
In the 2024 report, non-QoE findings accounted for 21.5% and QoE discrepancies 15.4%: 36.9% combined. A year later that same pair reached 46.6%. Credit got easier and scrutiny got harder, in the same window.
The market backdrop reinforces it. PwC’s US Deals 2026 midyear outlook records $1.2 trillion of corporate deal value in the first five months of 2026 against $603 billion a year earlier — on slightly fewer transactions (4,653 versus 4,851). More capital is concentrating into larger deals, and larger deals get inspected harder. Meanwhile Deloitte’s M&A Trends Pulse Survey of 1,500 dealmakers found over 80% expecting greater volume and value in 2026. Busier pipelines do not mean gentler diligence.
Cause #1: Non-QoE Diligence Findings (25.3%)
This is the largest single category and the most miscellaneous. It covers everything a buyer discovers that is not a restatement of earnings. In practice it clusters into a short list:
Customer concentration. One client at 30% of revenue is not a detail; it is a valuation input. Buyers price it as risk or walk from it.
Contracts that do not transfer. Change-of-control clauses, non-assignable leases, and key agreements that were never signed at all.
Tax exposure. Unfiled returns, misclassified contractors, sales-tax nexus in states nobody checked.
Missing documentation. Not a red flag in itself, but it reads as one. A gap the seller cannot explain quickly becomes a gap the buyer assumes the worst about.
Operational surprises. Deferred maintenance, key-person dependency, systems held together by one long-tenured employee.
The pattern we see most often is that none of these are discovered late because they are cleverly hidden. They are discovered late because nobody looked first.
Cause #2: When Quality of Earnings Restates Your EBITDA (21.3%)
A quality-of-earnings review is an independent test of whether reported earnings are real, recurring and transferable. It killed 21.3% of the deals in Axial’s 2025 sample — and the mechanism is arithmetic, not sentiment.
Almost every private transaction is priced as a multiple of adjusted EBITDA. Restate the EBITDA and the price restates itself, without either side arguing about the multiple. Illustratively: at a 5x multiple, a $400,000 EBITDA correction removes $2 million of enterprise value automatically.
The gaps are not always dramatic. One case in the Axial data records that “after spending a hefty sum on QoE, the EBITDA was off by between $265k and $594k”; another deal showed EBITDA overstated by 25%. The usual culprits are add-backs that do not survive scrutiny: owner compensation normalised too generously, one-off costs that recur annually, revenue recognised early, working capital that was quietly funding the business.
The Other Half: Renegotiation, Cold Feet, Financing, Underperformance
The remaining causes in the 2025 data account for 46.7%, with 6.7% unclassified:
Renegotiation challenges (14.7%). The price reopened and the two sides could not land it again. Usually a second-order effect of a finding, which is why the true diligence share is higher than 46.6%.
Seller decisions (13.3%). The owner withdrew. Sometimes better terms elsewhere, often the realisation mid-process that they were not ready to sell.
Financing constraints (10.7%). Half what it was in 2023, but still one deal in ten.
Business underperformance (8.0%). Trading deteriorated while the deal was in flight — the strongest argument for a short process.
How Long You Actually Have: The Exclusivity Clock
Deals do not die on a deadline; they die somewhere in the middle of exclusivity. Axial’s 2025 data gives the average number of days a broken LOI survived before it collapsed, by buyer type:
Buyer type
Avg. days under exclusivity before breaking
Avg. revenue
Avg. EBITDA
Search fund
70
$5.7M
$1.9M
Private equity
106
$13.3M
$2.7M
Independent sponsor
129
$21.8M
$5.2M
Two to four months of management attention, legal fees and QoE spend, ending in nothing. And yes — a buyer can walk after signing. An LOI is almost always non-binding as to price and closing; what binds is exclusivity, confidentiality and expense allocation. In the 2024 report the range by industry ran from 58 days in transportation to 136 in industrials, so sector norms matter too.
A Finding Landed. Renegotiate, Restructure, or Walk?
A diligence finding is not automatically fatal. What matters is whether the issue is a pricing problem, a risk-allocation problem, or a thesis problem. Each has a different instrument.
What diligence found
Usual remedy
Why it works
EBITDA restated downward
Price reduction at the same multiple
Keeps the agreed multiple intact; the arithmetic does the arguing
Working capital below normal levels
Working capital adjustment against a peg
Settles at closing without touching headline price
Contingent liability (tax, litigation)
Escrow or indemnity holdback
Prices the risk only if it materialises
Unproven forward performance
Earnout
Moves the disputed value into the future, payable on evidence
Unknown-unknowns in reps
Representations & warranties insurance
Transfers residual risk to a third party
The investment thesis itself is wrong
Terminate
No structure repairs a business the buyer no longer wants
Structural remedies are mainstream, not exotic. SRS Acquiom’s 2026 M&A Deal Terms Study, covering more than 2,300 private-target acquisitions worth $569 billion, tracks earnouts, escrows and working capital purchase price adjustments as standing features of private deals.
How to De-Risk a Deal Before Diligence Starts
Every leading cause of failure in this data is discoverable in advance. The work is to find it before the buyer does, while you still control the narrative and the clock.
Run a sell-side QoE, or at least a rehearsal of one. Have an independent party test your add-backs before a buyer’s accountants do. Finding the problem yourself costs a fee; having it found for you costs a repricing.
Document every adjustment at source. Each add-back should have a document behind it, not an explanation. Where we work with first-time sellers, this is consistently the largest single gap.
Stress-test your concentration numbers. Revenue by customer, by contract length, and by renewal date. If one client is over 20%, prepare the answer rather than waiting for the question.
Audit contract assignability. Pull every material agreement and check change-of-control language now. Consents take weeks and always arrive late.
Populate the data room before you go to market. A complete room shortens exclusivity, and a shorter exclusivity is a smaller window for trading to deteriorate underneath the deal.
Fix the timeline expectation internally. Management fatigue is a real failure mode across a 100-day process.
The mechanics of each step are set out in our sell-side due diligence checklist, which covers the document categories, the data-room structure and the sequence in full.
Common Mistakes to Avoid
Treating the LOI as a close. It is the start of the hardest phase, and the phase where roughly half of failures happen.
Sending documents reactively. Answering requests one at a time signals disorganisation and stretches the clock.
Presenting adjusted EBITDA without the audit trail. The number is only as strong as the evidence stapled to it.
Assuming a finding means the deal is over. In the deals we have watched close after a bad QoE, the difference was a seller who came back with a structure instead of a defence.
Letting the process run long. Time is the one risk that compounds every other one.
Diligence findings are the leading cause. In Axial’s 2025 Dead Deal Report, 25.3% of broken LOIs died on non-QoE diligence findings and 21.3% on quality-of-earnings EBITDA discrepancies — 46.6% combined.
What percentage of deals fail during due diligence?
Of the 75 broken LOIs Axial analysed in 2025, 46.6% failed on diligence findings. Counting renegotiation triggered by those findings, the diligence phase is implicated in more than half.
What is a quality of earnings report?
A quality-of-earnings report is an independent test of whether reported earnings are real, recurring and transferable. It re-examines add-backs, revenue recognition and working capital, and often restates adjusted EBITDA.
Can a buyer walk away after signing an LOI?
Yes. An LOI is normally non-binding as to price and closing; only exclusivity, confidentiality and expense terms bind. Axial’s 2025 data shows private equity buyers walked after an average of 106 days under exclusivity.
What are the biggest due diligence red flags?
Customer concentration above roughly 20% of revenue, add-backs without documentation, contracts with change-of-control clauses, unresolved tax exposure, and missing records the seller cannot explain quickly.
How long does due diligence take before a deal closes?
Broken deals in Axial’s 2025 sample lasted 70 to 129 days under exclusivity depending on buyer type. The 2024 report showed an industry range from 58 days in transportation to 136 in industrials.
Glossary
Letter of intent (LOI)
A signed outline of deal terms, usually non-binding on price but binding on exclusivity and confidentiality.
Exclusivity period
The window in which the seller may not talk to other buyers. The period in which most dead deals die.
Adjusted EBITDA
Earnings before interest, tax, depreciation and amortisation, normalised for one-off and owner-specific items. The base the price multiple is applied to.
Add-back
A cost added back to earnings on the basis that it will not recur for the new owner. The most contested line in any QoE.
Working capital peg
An agreed normal level of working capital; the closing price adjusts for any shortfall or excess against it.
Earnout
Deferred consideration paid only if agreed performance targets are met after closing.
Representations & warranties insurance (RWI)
Insurance covering losses from a breach of the seller’s warranties, shifting residual risk off the parties.
With a background in decision sciences, Alex Harris leads marketing and communications at Valutico, where he focuses on making the increasingly complex world of valuations and deal-making more accessible to finance professionals worldwide.From valuation and deal preparation to diligence and transaction execution, Alex helps translate specialist knowledge, emerging technology and best practice into engaging webinars, white papers, training, articles and videos that professionals can put into practice.
Author: Alex Harris
