Under LOI? Here’s When Walking Away Is the Smart Move
Chris Barrett
When to Walk Away from an LOI Before Closing
Signing a Letter of Intent (LOI) is a big step in acquiring a business. It signals serious intent, begins due diligence, and often involves commitments of time, effort, and money. But being under LOI does not guarantee you should go all the way to closing. Sometimes walking away is the smartest decision you can make. In this article, you’ll discover three critical reasons to walk away before closing so you can avoid buying the wrong company and instead, invest in the right one.
1. The Financials Aren’t Adding Up
Expectation vs Reality
One of the most common acquisition deal breakers is that the financials you expect simply don’t materialize. Once you bring in a quality earnings analysis, you may find that EBITDA (or IBIDA), cash flow, and working capital projections are much weaker or more demanding than initially represented.
The seller’s numbers might have included aggressive add‑backs, optimistic forecasts, or hidden liabilities. If the financials aren’t lining up with what was promised, the risk becomes high: you could end up with a business that loses money or requires much more investment just to maintain operations.
Hidden Costs & Working Capital Issues
It’s not unusual for actual working capital needs to be higher than what was allowed or discussed. Deferred maintenance, pending liabilities, required capital expenditures, or even seller’s unwillingness to include certain assets can eat into cash flow quickly. If the seller allowed only minimal working capital to be included or omitted needed assets, you might have to dip into your own resources post‑closing just to keep things running. It’s not just about the earnings you see; it’s about what the company actually needs. If the hidden costs are piling up, that’s a red flag.
2. Trust Issues with the Seller
Why Trust Matters During Transition
Even after closing, your success often depends on how willing and able the seller is to help you transition. That could mean training, transferring relationships, showing you the systems, and sometimes just being available for questions. If the seller has not shown transparency or reliability up front, the odds of friction post‑close rise dramatically.
Early Red Flags
- Vague or evasive answers for basic, legitimate questions
- Discrepancy between what the seller says verbally and what’s in the documents
- Reluctance to provide full access to financial or operational data
- No clear plan or commitment for post‑closing support
If any of these show up, you need to ask: Can I really count on this seller after closing? If the answer is no—or even “I’m not sure”—walking away might be better than regretting later. If you feel like you can’t trust the seller early, you’re better off accepting this is a deal breaker and stepping away before you invest further.
3. Culture & Values Misalignment
What Culture Means in an Acquisition Context
Culture isn’t just buzzwords. It’s how people behave, how decisions are made, how customers and employees are treated. It includes leadership style, work environment, norms of communication, pace of business, values around quality, service, ethics.
If the way you plan to run the business post‑acquisition is drastically different from how the target business has run it, there will be friction among employees, customers, and systems.
Consequences of Culture Clash
- High employee turnover: people leave when they don’t see alignment, feel disrespected, or feel the way things are done doesn’t match what they signed up for
- Decline in customer experience if staff morale drops or service standards change significantly
- Internal miscommunication, conflict, and inefficiencies all eat into profits, drag down growth, and may nullify the deal’s value altogether
Culture isn’t just about perks or what’s written on a wall. It’s how the business operates, and will greatly impact everything from the top down, influencing employee, vendor, and customer choices to stay or leave.
How to Perform Proper Due Diligence to Avoid These Deal Killers
To protect yourself before closing, focus on these due diligence steps:
- Financial due diligence: Get a clean, third‑party quality earnings or cash‑flow analysis; understand working capital needs; ask for historical statements, forecasts, recurring vs non‑recurring revenues; inspect seller’s add‑backs assumptions
- Seller assessment: Check references, ask questions that test transparency; look for consistency in story vs documentation; ensure there’s clarity on post‑closing support and obligations
- Cultural due diligence: Do leadership interviews, survey employees, observe how things are run day to day; compare styles, values, decision‑making, communication; identify deal breakers (things you cannot compromise on); plan for integration of culture if deal goes forward.
Compare the cost of walking away now vs staying and investing when the underlying risks will erode value. If you see multiple red flag such as financials misaligned, trust issues, culture mismatch, it’s likely the deal won’t perform as hoped after closing. If multiple deal breakers are present, the downside often outweighs the upside. You may be better off redirecting your effort and capital to an acquisition that is cleaner, more aligned, and less risky.
Bring in advisors such as CPAs, consultants, or attorneys who’ve seen deals fall apart. They can help you evaluate whether the downside risk is tolerable, or whether it’s simply not worth pushing forward. Use them to evaluate red flags. They can help you run the numbers, assess trustworthiness, evaluate culture, and decide whether the deal is worth pushing forward or better off walking away.
When Walking Away Is the Right Decision
It’s hard to walk away. There may be emotion, momentum, sunk costs. However, walking away early is not failure – it is the chance to save yourself money, time, reputation and stress.
A Letter of Intent isn’t a guarantee. It’s often the point where you still have options. When you see that the financials don’t hold up, when you aren’t confident in the seller’s integrity, or when the culture and values don’t align, sometimes the wisest move is to walk away. In the world of business acquistions, it’s important to know and acknowledge the limits of your deal breakers.
If you’re under LOI on a small business and wondering whether you should proceed or walk, reach out. I’m Chris Barrett with Midwest CPA. We help acquisition entrepreneurs avoid buying the wrong company and successfully grow the right one.
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Disclaimer
The content contained in this blog post is intended for general informational purposes only and is not meant to constitute legal, tax, accounting, or investment advice. You should consult a qualified legal or tax professional regarding your specific situation.