Deal process
What causes a business sale to fall apart in due diligence — and how to prevent it
The failure points that kill signed deals, how long diligence really takes, and how to stop a buyer retrading the price
By Michael D. Rubin, CEO & Founder · September 2026 · 1,566 words
Most sales that fail, fail after the letter of intent is signed — and almost always because something was found in due diligence that the seller knew about and had not disclosed, or did not know about because nobody had looked. Diligence rarely uncovers fraud. It uncovers disorganization, and disorganization reads to a buyer as risk.
Due diligence on a lower middle market Texas company typically runs 45 to 90 days from the signed letter of intent. This article covers what buyers look for, the six things that most often derail a deal, and what to do about each before you are in the middle of it.
What due diligence actually is
Once you accept a letter of intent you have usually granted exclusivity: for a defined period you cannot talk to other buyers. Your negotiating leverage, which came from competition, is now suspended. The buyer then verifies everything they were told.
Their team will typically cover financial diligence (are the earnings real and repeatable), legal (contracts, litigation, corporate records, licenses), operational (customers, suppliers, systems, people), and where relevant environmental and property.
Understanding that sequence explains the whole dynamic. Anything discovered during exclusivity is discovered at the moment you have the least leverage. That is why preparation, not negotiation, is what protects the price.
The six failure points, in order of frequency
1. Financial records that do not reconcile
The most common. Profit and loss statements that do not tie to the tax returns. Add-backs with no documentation. Revenue recognized inconsistently. Personal expenses mixed into the accounts without a schedule.
None of this is dishonest, and all of it is expensive. Each unexplained difference makes the buyer question everything else, and the discount is applied at the multiple.
Prevent it: have a CPA reconcile three years of statements to the tax returns before you go to market, and build the add-back schedule with the documentation attached. If you would be uncomfortable handing your accounts to a stranger, that discomfort is the work.
2. Customer concentration that emerges late
A buyer who learns in week six that one customer is 35% of revenue does not just reduce the price — they question what else has not been mentioned.
Prevent it: disclose concentration on day one, with the relationship history, the contract, the renewal record and who inside the customer knows the business rather than knows you. A concentration that is explained early is a factor. One that is discovered late is a reason to retrade.
3. Working capital
Almost every transaction requires you to leave a 'normal' level of working capital in the business at closing. If the definition and the target are not agreed early, they become a fight at the closing table when nobody has any appetite left.
Prevent it: agree the definition of working capital, the calculation method and the target in the letter of intent — not in the purchase agreement. A twelve-month average is common. Get your accountant to model it before you sign anything.
4. Owner dependence discovered in the operational review
The buyer interviews your managers and discovers that pricing decisions, key relationships and the technical knowledge all run through you. The company they thought they were buying is not there.
Prevent it: this is the one that cannot be fixed during diligence. It takes twelve to twenty-four months of deliberate delegation, documentation and building a second layer. It is also the single change with the largest effect on price. How to reduce owner dependence before a sale.
5. Contracts, leases and licenses that do not transfer
A change-of-control clause in your largest customer contract. A lease that requires landlord consent. A license held personally by the owner. Each one hands somebody outside the transaction a veto.
Prevent it: read every material contract for change-of-control and assignment language before going to market. Where consent is required, know who gives it and what they will want.
6. Deliberate retrading
Some buyers sign a high letter of intent intending to renegotiate later. It is a strategy, and exclusivity is what makes it work.
Prevent it: check references from sellers the buyer has bought from before, keep exclusivity periods short and tied to milestones, resist letters of intent that are far above the others without a reason, and — the important one — keep the underbidders warm. A seller who can credibly walk away is a seller who is rarely retraded.
How long it takes, and what it costs you
The last line of that table is the one owners underestimate: you have to keep running the business through all of it. Performance that dips during diligence is itself a reason for a buyer to reduce the price. This is a large part of what an advisor is for — absorbing the request lists so the owner can keep the numbers where they were when the offer was made.
| Stage | Typical duration | What the seller is doing |
|---|---|---|
| Letter of intent negotiated | 1–3 weeks | Agreeing price, structure, working capital and exclusivity |
| Financial and legal diligence | 30–60 days | Answering requests, providing documents, running the business |
| Purchase agreement drafted | 2–4 weeks, overlapping | Your attorney negotiating reps, warranties and indemnities |
| Financing and closing conditions | 2–6 weeks | Lender diligence, landlord consents, third-party approvals |
What good preparation looks like
Sellers who come through diligence at the agreed price tend to have done the same handful of things:
- A data room built before going to market, not assembled under pressure
- Three reconciled years of financials, plus an add-back schedule with documentation
- A written explanation of every anomaly in the numbers, prepared in advance
- Material contracts reviewed for change-of-control clauses
- A working capital calculation modeled before the letter of intent is signed
- A transaction attorney engaged early — not the attorney who wrote your lease
- Underbidders kept warm until the money is in the account
That list is most of what our ten-step process exists to produce, and most of what a pre-exit engagement does when there is time to do it properly.
If you are already in diligence and something has surfaced, call before you concede anything. The order in which you respond changes the outcome more than the response does.
What a diligence request list actually contains
Owners are often surprised by the volume. A buyer's list for a company in our range typically runs to 120 to 200 items across five areas. None of it is unreasonable; all of it is faster if it already exists.
| Area | What is asked for | Where it usually goes wrong |
|---|---|---|
| Financial | 3 years of statements and tax returns, monthly detail, add-back support, AR and AP aging, revenue by customer | Statements that do not tie to the returns |
| Legal & corporate | Formation documents, minute books, cap table, licenses, litigation history, insurance | Records that were never kept current |
| Commercial | Customer contracts, supplier agreements, pricing, pipeline, churn | Change-of-control clauses nobody had read |
| Operational | Organization chart, employee terms, benefits, equipment lists, systems, leases | Key people on nothing in writing |
| Environmental & property | Permits, site history, lease terms, condition reports | A historical site issue that was never documented as resolved |
How a professional seller answers a request list
- Everything in one indexed data room, not emailed piecemeal. A buyer who has to chase concludes the answers are being managed.
- A single point of contact who tracks what has been asked and what has been sent.
- Bad news first, in writing. Anything a buyer will find should be disclosed with your explanation attached. Disclosure costs a little; discovery costs a lot.
- A weekly rhythm — one consolidated set of answers a week beats forty replies, and it keeps the process on your schedule rather than theirs.
- No changes to the business during diligence that were not already planned. New accounting, new systems, a restructured team — each one restarts a piece of the work.
When a buyer asks to reduce the price
It happens, and it is not automatically bad faith. Something genuinely new may have surfaced. What matters is how you respond in the first forty-eight hours.
Ask for the reduction in writing, with the specific finding and the arithmetic behind it. A buyer who cannot produce that is testing you, not diligencing you.
Separate the finding from the number. A working capital issue is not a reason to reduce enterprise value; it is a reason to adjust working capital. A one-off cost is not a reason to reprice recurring earnings.
Consider structure before price. A retained escrow, an indemnity or a holdback tied to the specific risk is nearly always better than a permanent reduction to the headline.
And know your alternative. If the underbidders are still warm, the conversation is different — which is the whole argument for running a competitive process rather than a single-buyer negotiation.
How long you should expect this to take you personally
Plan for the equivalent of one day a week for two to three months, concentrated in the first four weeks. That is the honest figure, and it is the reason owners who run a sale alone so often see performance dip during exactly the period a buyer is measuring it.
An advisor absorbs most of that: the request list, the data room, the chasing, the buyer's questions about the same schedule for the third time. What cannot be delegated is your knowledge of your own business, and that is what your day a week should be spent on.