Why the Highest LOI Often Becomes the Lowest Close Price
Phone call yesterday. A founder told me he just signed an LOI at $22M with a PE buyer. He was celebrating. I asked him what the working capital peg was. He did not know. I asked him how the buyer modeled his owner add-backs. He was not sure. I asked him if the quality of earnings provider had been selected yet. He said the buyer was handling that.
Three months later, the deal closed at $19.1M. The working capital peg cost him $1.4M. Two of the owner add-backs did not survive the quality of earnings review, which reduced EBITDA by $680K and compressed the valuation multiple. The effective price dropped 13.2 percent from the LOI.
This is not a story about a bad buyer. This is a story about preparation gaps that were invisible until diligence started.
We tracked 89 lower-middle-market transactions in Q4 2025 and Q1 2026 (https://dx.doi.org/10.2139/ssrn.6515478). Post-LOI price adjustments occurred in 68 percent of deals. The median adjustment was 9.8 percent downward. The highest compression we observed was 31 percent.
The pattern that emerged from the data: the highest LOI frequently became the lowest close price when the founder was not prepared for the buyer's underwriting model.
Here is why that happens.
Buyers write LOIs based on the information they have at the time. That information is limited. The CIM (Confidential Information Memorandum) presents the business in the best possible light. Management presentations emphasize growth and opportunity. Financial summaries smooth over timing issues, classification questions, and owner expenses that may or may not be addable.
The LOI reflects what the buyer believes the business is worth based on that limited information. The close price reflects what the buyer believes the business is worth after they have verified every claim, tested every assumption, and repriced every risk.
The gap between those two numbers is the preparation gap.
In our dataset, the most common repricing triggers were:
Working capital adjustments (appeared in 54 percent of transactions, median impact of $340K downward)
Owner add-back restatements (appeared in 47 percent of transactions, median EBITDA reduction of 8.3 percent)
Revenue recognition or timing issues (appeared in 31 percent of transactions, median impact of 5.1 percent revenue restatement)
Customer concentration or retention risk (appeared in 28 percent of transactions, median valuation multiple compression of 0.4x)
These are not surprises. These are predictable. Every one of these gaps is visible six to twelve months before the LOI if you know where to look.
The founders who close at or near the LOI price are the ones who surface these gaps early and fix them before the buyer does. They build a quality of earnings memo internally before the buyer orders one. They normalize working capital and document the peg methodology. They pressure-test add-backs with an accountant who knows what PE buyers will and will not accept. They document customer relationships and build a retention plan the buyer can underwrite.
That is not expensive work. It is detailed work. And it is the difference between closing at $22M and closing at $19.1M.
Most founders optimize for getting the highest LOI. The smart ones optimize for closing at the price on the LOI. Those are not the same thing.
If you are twelve to eighteen months from a potential sale, the question is not "what is my business worth?" The question is "what will a buyer believe my business is worth after they spend $150K on diligence?" The answer to that question depends entirely on how prepared you are for the repricing conversation.
The highest LOI is meaningless if it compresses by 13 percent before close. The work that prevents that compression is not done during diligence. It is done in the twelve months before the process starts.