This week's newsletter is guest written by Chris Barrett. Chris leads Midwest CPA, a modern accounting and advisory firm that has supported 250+ acquisition entrepreneurs since inception. The Midwest CPA team specializes in quality of earnings, net working capital, tax strategy, and fractional CFO services giving buyers and owners clarity and confidence at every stage of the deal. Connect with Chris on LinkedIn.

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 newsletter, 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 include 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 represents 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 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: If the seller allows, you can do leadership interviews or review surveys of 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 is non-binding for a reason. 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. When buying a business, 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.

For more information on business acquisition and related topics, check out our resources hub.

-Chris Barrett

Midwest CPA

If you're buying a business, make sure to reach out to the Pioneer Capital Advisory team:
​

For pre-LOI buyers ready to explore opportunities: Schedule a meet & greet call​

Already have a deal under LOI and need financing help: Schedule an LOI consultation​

Whether you're beginning preliminary acquisition exploration or conducting due diligence on identified targets, we provide strategic guidance on financing options and lender introductions tailored to your specific circumstances.

Matthias Smith​
Pioneer Capital Advisory LLC

Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

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