What Kills Business Deals in Due Diligence: The Most Common Reasons Sales Fall Apart

Sunbelt Canada Calgary · Selling a business

What kills business deals in due diligence? Often, it is a gap between the business a buyer expected and the evidence they find: lower sustainable earnings, a contract that needs consent, an uncertain customer relationship or financing that does not come together.

Receiving a Letter of Intent (LOI) is an important milestone. It is also the start of a demanding verification process. For Calgary and Alberta business owners, preparing before that stage can reduce avoidable surprises and put negotiations on firmer ground.

The LOI is not a done deal

An LOI typically records proposed commercial terms and a framework for the next steps. It may include conditions for diligence, financing and third-party approvals. Although the obligation to complete the purchase is often non-binding at this stage, provisions such as confidentiality and exclusivity can be binding. The wording matters.

Have your lawyer review the document before signing. Do not assume that a headline price guarantees either a closing or a particular amount of cash at closing. BDC’s guide to acquisition LOIs explains why these documents can carry legal weight.

What business sale due diligence involves

The buyer and their advisors examine the financial, commercial, legal and operational evidence behind the proposed purchase. The scope can include customer relationships, employee arrangements, assets, tax filings, technology and intellectual property.

Financial review and legal drafting often happen alongside lender underwriting. The timetable depends on complexity, information quality and required consents. BDC suggests allowing at least a month or two for a proper review; some transactions need substantially longer. See BDC’s due diligence guide.

What failed-deal data actually tells us

Axial’s 2025 Dead Deal Report analysed 75 unsuccessful Axial-sourced transactions across eight firm types and eight industries. The reported causes included:

These selected categories do not total 100%. This is a sample of failed transactions, not a measurement of how often all LOIs fail or a forecast for Alberta small-business sales.

Together, the two diligence categories represent 46.6% of that sample. The practical lesson is to examine financial and non-financial issues early. The report does not establish that every issue was preventable or that diligence alone determines whether a sale closes.

1. Earnings that do not withstand financial review

A buyer may commission a Quality of Earnings (QoE) report to investigate the sustainability of reported results and proposed adjustments. Its scope varies. A QoE is not automatically an audit, does not “certify” EBITDA and does not remove the buyer’s need to form an independent view.

When the earnings supporting a price change, the proposed valuation may change with them. The following example holds the multiple constant to show the arithmetic; it does not predict an actual renegotiation.

Unsupported add-backs

A personal expense needs documentation and a clear explanation. A family member’s salary cannot simply disappear if someone still needs to do the work. A legal bill described as exceptional may be an ongoing cost if similar matters arise regularly.

Keep an adjustment schedule that identifies the original expense, the supporting records and why the cost is unlikely to continue. Our EBITDA vs. SDE guide explains how owner compensation and replacement-management costs affect that calculation.

Revenue timing and sustainability

Cash received is not always revenue earned. A customer’s advance payment may relate to future obligations. Likewise, a strong project year should be evaluated against the company’s normal project cycle; a project is not automatically excluded simply because that specific contract will not repeat.

Be ready to explain large changes in sales, margins, pricing, renewals and backlog. Legitimate growth can withstand scrutiny. Recording future revenue too early, or presenting temporary income as recurring, creates a different problem.

Records that do not reconcile

Tax returns and management accounts can differ for valid reasons. What concerns a buyer is the absence of a clear reconciliation. Conflicting versions of monthly results, unexplained adjustments and missing invoices create uncertainty about which figures to trust.

For a larger or more complex sale, a sell-side QoE may be worthwhile. For a smaller transaction, a focused accountant-led review can be proportionate. Agree the scope with your advisors rather than assuming every business needs the same report. Advance work helps reveal issues; it does not guarantee the buyer will accept every adjustment.

2. Customer concentration without a credible explanation

A large customer can support strong earnings and create significant exposure at the same time. A buyer will want to understand the account’s share of revenue and gross profit, renewal history, contract terms and relationship with the owner.

There is no universal percentage at which every buyer lowers the price or walks away. A long-standing contracted relationship and a cancel-anytime project account present different risks, even when each represents the same proportion of sales.

Build a customer schedule showing several years of revenue, margins where available, contract expiry dates and recent developments. Consider what would happen to cash flow if the largest account reduced purchases. Do the remaining earnings still support operations and acquisition debt?

If you have time before selling, diversify the customer base and introduce other team members to key accounts. A contract may improve visibility, but it does not eliminate credit risk or guarantee future orders. A customer’s confirmation of the current relationship is also not a promise to remain indefinitely.

Coordinate any buyer contact with customers through an agreed process. Early preparation should protect confidentiality as well as answer legitimate diligence questions.

3. Contracts, leases and permits that complicate the transfer

Assignment restrictions and change-of-control clauses are different issues. An asset transaction may require agreements to be assigned. A share transaction may leave the contracting company in place while still triggering a change-of-control provision. The actual contract determines which consents, notices or rights apply.

Have your lawyer prepare a schedule of material customer and supplier agreements, the premises lease, financing documents, franchise arrangements and important software licences. Record the relevant trigger, counterparty, required action and expected timing.

Why the premises lease deserves early attention

A short remaining term, uncertain renewal option, landlord consent requirement or unexpected rent increase can change the buyer’s operating plan. Also identify existing guarantees. A sale does not necessarily release a seller from a personal guarantee; any release needs to be addressed expressly with the relevant parties.

Can the buyer operate on day one?

Review the licences, permits and professional qualifications required for the specific business and location. Some may remain with the entity; others may require consent, amendment or a fresh application. Build the necessary steps into the closing timetable instead of assuming everything transfers.

Our guide to asset sales versus share sales explains why transaction structure matters beyond the headline purchase price.

4. Tax exposure and liabilities that were not addressed

For an Alberta business, a review may include corporate income tax, GST/HST, payroll remittances, shareholder accounts and obligations in other jurisdictions where the company operates. Outstanding assessments, missing filings and unresolved disputes should be identified and explained.

Worker classification also matters. Calling someone an independent contractor does not settle their status. The CRA explains that the employment relationship affects reporting and withholding obligations for CPP, EI and income tax. See its guidance on determining employment status.

In a share purchase, the corporation generally remains responsible for its existing obligations; the buyer acquires ownership of that corporation and the associated economic exposure. Contractual protections may allocate risk between buyer and seller, but they do not simply erase claims by tax authorities or other third parties.

An asset purchase is not a guarantee of freedom from all liabilities either. Assumed obligations and applicable law require review. Ask your advisors to address the actual structure and facts.

Beyond tax, check pending disputes, warranty claims, employee commitments, security interests, environmental concerns and ownership of essential intellectual property. A proposed indemnity or holdback can help allocate some risks, but only if the parties agree on clear terms and a practical source of recovery.

5. A business that depends too heavily on the seller

The owner may be the lead salesperson, estimator, technical expert and final decision-maker. A buyer needs to know which of those functions will continue after closing and what replacing the rest will cost.

Prepare a realistic map of your responsibilities. Identify who manages key accounts, approves pricing, resolves quality issues and maintains supplier relationships. Document the processes that currently rely on your memory.

Start transferring appropriate responsibilities to capable team members before the sale. Build a transition plan with clear duties, duration, availability and compensation. Do not promise unlimited support just to keep a deal moving.

Retention discussions with key employees may also be important, but their timing should be coordinated. An earnout can allocate certain performance risks; it cannot substitute for a workable handover. Read our earnout guide before accepting payment terms tied to results after closing.

6. Delays, unclear answers and misaligned expectations

A slow response does not prove a seller is hiding something or experiencing remorse. It may reflect workload, unclear requests, missing records or legitimate confidentiality concerns. Still, unexplained delays make it harder for a buyer to assess risk and keep advisors and lenders on schedule.

Use one request list with an owner, due date and status for each item. If a document is unavailable, explain why and propose an alternative. Keep a record of answers so different advisors are not receiving conflicting explanations.

Maintain appropriate access controls and agree when sensitive employee, customer or commercially competitive information should be shared. Responsiveness does not require indiscriminate disclosure.

Seller readiness matters too. Discuss price expectations, post-sale involvement, employee priorities and what life after the sale will look like before exclusivity begins. If your intentions change, involve your advisors promptly and review your obligations rather than allowing the process to drift.

7. Financing gaps and deteriorating performance

A willing buyer is not the same as a fully funded buyer. A lender may take a different view of sustainable earnings, collateral, working-capital needs or the buyer’s equity contribution. Preliminary interest or pre-qualification is not an unconditional commitment to fund.

Ask for credible evidence of the proposed financing plan and keep financing milestones visible. BDC recommends starting acquisition financing discussions early because the analysis takes time. Its business purchase financing information outlines the importance of preparing for that review.

For Canadian buyers, the mix may include bank or credit-union debt, BDC financing, equity and negotiated vendor financing. The appropriate structure depends on eligibility, underwriting and the deal. U.S. SBA lending should not be treated as the default financing route for an Alberta acquisition.

Keep operating the business during the sale

Customers still need attention while documents are being assembled. Track current revenue, margins, backlog, staff changes and cash requirements against the figures used in the sale process. Explain significant developments promptly.

A missed forecast can have several causes. Distinguish timing from a lasting decline and support that explanation with evidence. Preparation reduces avoidable disruption, but changes in markets, customer behaviour or funding conditions can still affect a transaction.

A pre-sale due diligence checklist for sellers

Start early enough to improve the business, not merely assemble documents. Use this practical planning checklist with your broker, accountant and lawyer, and adjust the scope to the size and complexity of your sale.

Not every finding ends a deal. Some require better evidence, a consent, a targeted remedy or a negotiated allocation of risk. The most useful preparation makes those choices visible while there is still time to act.

Frequently asked questions about due diligence failures

Can a buyer walk away after signing an LOI?

Often the proposed purchase remains conditional, but the answer depends on the document and circumstances. Confidentiality, exclusivity and other obligations may still apply. Get legal advice before assuming either side can withdraw without consequences.

Does every seller need a Quality of Earnings report?

No single scope fits every business. A full sell-side QoE may be appropriate for a complex transaction, while a focused financial review may suit a smaller sale. Discuss the likely buyer’s expectations and the value of the work with your advisors.

Is customer concentration automatically a deal breaker?

No. Buyers consider the account’s economics, relationship history, contract terms and the impact of losing it. Concentration should be evaluated openly rather than reduced to a universal percentage cutoff.

How can I reduce the risk of a late price reduction?

Support the original valuation with reconciled financials, documented adjustments and clear disclosure. Agree important transaction assumptions early and keep the buyer informed of material changes. Those steps improve the basis for negotiation without guaranteeing a fixed outcome.

This article provides general information. Transaction documents, tax treatment and legal obligations depend on the facts and should be reviewed with qualified advisors. The valuation example uses Canadian dollars and an illustrative multiple.