Why Did My Offer Drop After Due Diligence?
By Ed Weeks Jr., MBA, CM&AA, Weeks Consulting Group
Last updated: October 16, 2026
Usually because the paper didn’t back the number. The price in a letter of intent is a claim about what your business earns. Due diligence is the buyer, and the buyer’s lender, testing that claim against your bank statements, your books and your tax returns. Wherever they don’t tie, the price comes down.
I call this paper before price. When the paper is done before you go to market, there’s no BS at the table. When we get to the end, nobody’s knocking every adjustment, every add back.
Why does the paper matter more than the price?
A headline price is a claim about what your business earns and will keep earning. Everything that happens after a letter of intent is an attempt to prove or disprove that claim.
That is why two companies with similar earnings can end up with very different outcomes. One has clean monthly closes, documented adjustments, and numbers that tie. The other has a good story and a shoebox. The first gets financed on reasonable terms. The second gets a lower price, a heavier structure, or a stalled process.
Can a buyer finance my price?
Most buyers of companies your size use debt. Individual buyers often use SBA loans. Private equity buyers use senior lenders. Either way, the lender’s question is the same: can this company’s past earnings cover the debt that will be placed on it?
The SBA’s updated lender rulebook, SOP 50 10 8.1, is a useful example of how explicit that has become. It applies to applications issued an SBA loan number on or after October 1, 2026. For an initial acquisition, the lender must see debt service coverage of 1.25 times, up from 1.15 times. That coverage is measured on your last fiscal year or the average of your last two. The lender has to evaluate the buyer’s projections, but generally cannot rely on them to meet the requirement. Qualifying owner-occupied special-purpose property transactions have an exception.
In plain terms, your company’s history now sets the ceiling on what an SBA buyer can borrow to pay you. A standard 7(a) loan tops out at $5 million, so this reaches a lot of owners whose businesses would sell in the low millions.
What does a quality of earnings review test?
A quality of earnings review, usually called a QoE, is a deep check on whether your earnings are real, whether they repeat, and whether the cash backs them up. Private equity buyers have used them for years. Under the SBA’s 2026 rules, lenders generally need an independent QoE for initial acquisitions and business expansions with a business purchase price of $3 million or more. A seller-commissioned report does not qualify. A buyer-commissioned report may be used after lender-vendor review. Owner buyouts, ESOP and cooperative transactions, and qualifying owner-occupied special-purpose property acquisitions have exceptions.
The SBA’s version spells out what a good QoE does anyway:
- It rebuilds the cash that actually moved through your bank accounts and ties it to your income statement and your tax returns, for the trailing twelve months and the last two fiscal years.
- It identifies and documents every add-back.
- It looks hard at customer concentration.
If your deposits, your books, and your returns don’t tie, the review will find it. If they do tie, and you can show why, you have removed one of the most common reasons a price gets renegotiated.
A sell-side QoE, or a lighter readiness review, won’t replace a lender’s report. What it does is let you find the problems on your schedule instead of the buyer’s.
Which add-backs will a buyer accept?
Add-backs are the adjustments that turn reported profit into the earnings a buyer should expect after closing. Your personal vehicle, a one-time legal bill, a family member on payroll who won’t stay. They are legitimate, and they can add real value to a price.
They are also where optimism shows up first. Every add-back is a small claim, and each one needs support: invoices, contracts, payroll records, a clear explanation of why the expense won’t recur.
The practical test is simple. For every adjustment, ask whether a skeptical reviewer who has never met you would accept it from the paper alone. If the answer is no, either build the support now or stop counting it.
Will my biggest customers scare off a buyer?
Buyers and lenders both ask how much of your revenue comes from your largest customers. A high share isn’t automatically a deal breaker. An unexplained high share usually is.
What reduces the risk is evidence. How long have those customers been with you? Are there contracts, and what are the terms? Who owns the relationship, you or your team? What happens to that account if you step back?
Write those answers down before anyone asks. When the concentration question comes with facts attached, a buyer can treat it as a managed risk instead of a reason to discount.
What is the working capital peg?
Most purchase agreements include a working capital target, often called the peg. It is the amount of working capital, broadly receivables plus inventory minus payables, that the buyer expects to be left in the business at closing. Deliver less than the peg, and your price usually comes down by the difference. The exact mechanics depend on the agreement.
Pull twelve to twenty-four months of monthly balance sheets. Look at the seasonality. Decide what a normal month looks like for your business and why. Having your own number, with support, before a buyer proposes theirs is one of the simplest ways to protect the price you agreed to.
What happens to my price when debt gets tight?
Financing conditions shift, and when they tighten, the effect shows up in offers.
Two recent data points show how that works. On September 16, 2026, the Federal Reserve raised its benchmark rate a quarter point to a range of 3.75% to 4%, its first increase since 2023. GF Data reported that on new private equity platform deals in the second quarter of 2026, average total debt fell to 2.9 times EBITDA, down from 3.4 times the quarter before.
When a buyer can borrow less and pays more for it, something fills the gap. It might be a lower price or a bigger equity check from the buyer. Often, part of your price moves into structure:
- Seller notes, where you finance part of the purchase and get paid over time.
- Earnouts, where part of the price depends on how the business performs after closing.
- Rollover equity, where you keep a stake alongside the new owner.
Each of these can be reasonable. A fair seller note can widen your pool of buyers and close a gap that would otherwise end the conversation. Rollover equity can make sense if you believe in the new owner’s plan. But all three are deferred money with conditions attached, and they should be priced that way. Before you react to a headline number, ask how much is cash at close, what the note’s rate, term, and subordination are, and exactly what has to happen for an earnout to pay.
Should I carry a seller note?
With SBA buyers, the terms of your note can decide whether the buyer gets approved.
Under SOP 50 10 8.1, a seller note can count toward the buyer’s down payment only if it is on full standby, meaning no payments of principal or interest for the entire life of the SBA loan. Even then, standby seller debt, other standby debt and eligible minority investor equity together can cover no more than half of the required injection. Interest may accrue during standby, but payments are prohibited. A note that pays you along the way becomes part of the debt your earnings have to cover at 1.25 times.
That creates a real trade-off. A standby note can help a buyer qualify, but you may wait many years to see a dollar of it. A paying note gets you cash sooner, but it can shrink what the buyer can borrow. Decide which terms you would accept before an offer arrives, and ask a lender how each version would affect an SBA buyer.
When is the right time to sell?
Most owners have two clocks running. The household clock is personal: your age, your health, a spouse who is ready to have you home, a partner who wants out, and the after-tax number your family actually needs. It doesn’t care what the market is doing.
The company clock runs on how long it takes to produce clean numbers, build a couple of fiscal years that tell a consistent story, reduce dependence on your biggest customers, and develop a team that can run the business without you. None of that happens in a quarter. The sale process takes time as well. The IBBA and M&A Source Market Pulse survey for the second quarter of 2026 found lower middle market deals averaging eleven to twelve months from engagement to close.
Readiness is a common gap. In a BNY Wealth survey of 354 attorneys, investment bankers, and CPAs who work on business sales, only 48% said sellers are well prepared when the buyer’s review begins. The factor they named most often as likely to make a sale fall through was financing.
What should I get in order first?
This work pays off whether or not you ever sell. Lenders, investors, partners and buyers all read the same paper. Here’s the starting list:
- Tie out your bank statements, books, and tax returns for the last two fiscal years and the trailing twelve months.
- Document every add-back, with support a stranger would accept.
- Know your customer concentration, and write down why your largest customers will stay.
- Define your normal working capital from a year or two of monthly balance sheets.
- Decide which seller note terms you would accept, and understand how standby and paying terms affect different buyers.
- If your likely price is near $3 million or more and SBA buyers are in the picture, consider a sell-side QoE or a readiness review.
What should I do before I commit to a process?
If you have an offer in front of you, know what your number is worth once the structure is priced in, and what your records can support, before you commit to a process.
Economics before introductions. Paper before price.
This article is general education, not legal, tax, or lending advice. SBA requirements change; confirm current specifics with your lender and advisors.
Want to see where your business stands? Take the Business Optionality Assessment. It takes about 3 minutes: https://edweeksjr.com/assessment/
About the author
Ed Weeks Jr., MBA, CM&AA, Weeks Consulting Group. Ed advises owners of $2M to $20M businesses on growth, financing, M&A and exits.
