When deals die

Why Canadian lower-middle-market M&A transactions fail, and what you can do about it

By Karl E. Sigerist, Jr., ICD.D | Founder, President and CEO, The Shaughnessy Group

For most Canadian business owners, selling their company will be the single largest financial transaction of their lives. Their business is not merely an asset on a balance sheet. It is the product of years of early mornings, difficult decisions, accumulated relationships and deferred personal wealth. The stakes, financial and emotional, are as high as they get.

Which makes the evidence all the more sobering.

A rigorous analysis of more than 40,000 acquisitions worldwide over 40 years found that 70 to 75 per cent of acquisitions fail to achieve their stated objectives. A Harvard Business Review study found that more than 60 per cent of transactions destroy rather than create shareholder value, and up to 90 per cent fail to achieve their investment thesis. In Canada specifically, transactions are frequently taking longer to close as a result of tighter credit, challenging negotiations around valuations and other key deal terms, and general market uncertainty.

But those figures measure post-close underperformance. This article is concerned with a different problem: transactions that begin a formal sale process and never reach closing at all. One experienced M&A practitioner has compared the ratio to a car dealership on a busy weekend: roughly seven to 12 buyers out of every 100 who start the process actually complete a transaction.

The reasons deals fail are not random and they are not inevitable. They are, in most cases, predictable. And for Canadian lower-middle-market business owners, who are typically running a sale process for the first time, understanding where and why deals break down is the most practical preparation available.

The sell-side process: a brief map

A formal sell-side M&A process in the lower middle market typically runs nine to 12 months from mandate signing to close. It proceeds in six stages.

Stage 1: Preparation (one to two months)

The seller engages a sell-side advisor, cleans up the financials, and, critically, commissions third-party due diligence on their own business before approaching any buyer. This includes a quality of earnings (QofE) report from an independent accounting firm to normalize EBITDA, and a business readiness assessment to identify legal, structural and operational issues in advance.

Stage 2: Controlled buyer outreach and NDAs (two to three months)

An anonymous teaser is distributed to a curated list of strategic and financial buyers. Non-disclosure agreements (NDAs) are exchanged with interested parties, and the confidential information memorandum (CIM) is released only to qualified buyers who have executed an NDA.

Stage 3: Indications of interest, preliminary data room and management meetings

Buyers submit non-binding indications of interest (IOIs) with preliminary valuation ranges. Shortlisted buyers whose IOIs are compelling and sufficiently detailed receive staged, limited access to a virtual data room for preliminary due diligence. Sensitive information, including customer and supplier lists, employee details and intellectual property, remains redacted at this stage. Shortlisted buyers are invited to in-person management meetings and, where appropriate, facility tours.

Stage 4: Letter of intent and exclusivity

The preferred buyer submits a letter of intent (LOI) setting out a proposed price, structure, and an exclusivity period. Most LOI provisions are non-binding. Only specific clauses typically survive as legally enforceable obligations: the exclusivity or no-shop clause, confidentiality obligations, any agreed break-fee mechanism and the governing law clause. Commercial terms, including price, remain subject to negotiation until a definitive purchase agreement is executed.

Stage 5: Buy-side due diligence and buyer governance approvals (one to three months)

With the LOI executed and exclusivity in place, the buyer conducts comprehensive due diligence across financials, legal, tax, operations, human resources, intellectual property and customer contracts. Running in parallel, the buyer must obtain its own internal governance approvals, whether from an investment committee, a board of directors, a lender, or credit committee.

Stage 6: Negotiation of the purchase agreement and closing (two to six weeks)

The definitive purchase agreement is negotiated and executed, closing conditions are satisfied and ownership formally changes hands.

Process timeline

A typical lower-middle-market sell-side process runs nine to 12 months from mandate signing to close. Many take longer. Owners who are not prepared before launching the process frequently discover that timeline extends significantly, often to the detriment of both price and outcome.

Where deals break: stage by stage

Stage 1 failures: unpreparedness, underperformance and missing sector-specific assessments

Unpreparedness: the most preventable cause

The most commonly cited cause of deal failure is also the most preventable: the seller is not ready. Failing to take the necessary steps to prepare a business for sale is the most common reason a deal does not close. Messy financial records, revenue that cannot be substantiated, and owner compensation mixed into operating results without normalization are among the most frequent issues. Year-end financial statements prepared for tax compliance purposes are not the document a sophisticated buyer needs to underwrite a transaction.

Sellers who do not commission a QofE report and business readiness assessment before going to market consistently pay the price during due diligence. Buyers who discover issues the seller could have disclosed in advance treat every finding as leverage. The price reductions that result almost always exceed the cost of the vendor due diligence that was never done.

Legal and compliance issues not identified in advance compound the problem: contracts that are not assignable, unregistered intellectual property, expired licences, outstanding litigation and undocumented shareholder agreements. For Canadian sellers, the structure of the sale (share purchase versus asset purchase), the availability of the lifetime capital gains exemption and the tax treatment of any earnout payments must all be reviewed and planned before the process begins, not after an LOI is signed.

Relative underperformance: a structural constraint on the buyer universe

A profitable business does not need to be struggling to be a difficult sell. A business that trails its sector peers on gross margin, EBITDA margin, revenue growth rate, cost of goods sold or fixed-cost structure will attract a narrower subset of buyers and receive lower offers. Companies with EBITDA margins and growth above industry norms earn an average one to two times higher EBITDA multiple than their peers (Alphabridge). Adjusted EBITDA margins should fall within a range consistent with industry peers; if margins appear far below market, buyers will assume structural weakness or unsustainable performance (Ascension Advisory).

In the lower middle market, where businesses are often founder-owned and sentiment can be particularly sticky, the valuation realism lag has been pronounced. Buyers demand wider margins of safety, meaning lower multiples, especially for companies whose recent EBITDA has been trending down (Independent Investment Bankers Corp., 2025). Lower-quality assets, those that are cyclical, tariff-exposed or demonstrably under-invested, often see buyers sprint through diligence, find one too many surprises, and exit the process (Capstone Partners, Q4 2025).

Owners whose financial performance trails the midpoint of their peer group should address those metrics before going to market, or enter the process with a thoroughly calibrated expectation of what the market will pay and who will be in the buyer pool.

Sector-specific assessments: what certain businesses must do that others do not

A QofE report and a legal readiness review are baseline requirements for every lower-middle-market seller. However, businesses in specific industries face additional buyer scrutiny that requires additional pre-market preparation. Failing to conduct these assessments means buyers will form their own, often more conservative, conclusions during due diligence.

For technology-reliant businesses, a pre-market IT readiness assessment is not optional. In an analysis of more than 1,500 due diligence engagements, 85 per cent of businesses experienced medium to severe technology risk-related issues requiring remediation within the first 90 days of ownership, and in more than half of cases, unbudgeted IT funding requirements had a material effect on deal models (Bearing Point, citing West Monroe Partners). Technology integration issues account for approximately 30 per cent of failed mergers, according to Deloitte research (DueDilio, citing Deloitte). A seller who arrives at due diligence with an independent technology assessment, a documented IT architecture and a clear account of any technical debt is in a materially stronger negotiating position than one who leaves these questions for the buyer to discover.

For workforce-dependent businesses in sectors such as manufacturing, healthcare, logistics or skilled trades, a human capital or labour assessment is equally important. Research consistently finds that 70 per cent of M&A failures stem from people-related issues including talent exodus, hidden employment liabilities and inadequate workforce planning (29Bison, citing industry research). Failure to adequately examine the rights and obligations between the target company and its staff can result in expensive employment claims, administrative fines and other liabilities (Financier Worldwide). Key issues include employment contract gaps, non-compete coverage, collective bargaining agreements, pension obligations and key-person dependencies below the founder level.

For capital-intensive businesses in manufacturing, transportation or industrial services, independent appraisals of major capital assets and organized documentation of maintenance history and deferred capital expenditure are expected by sophisticated buyers. Buyers who discover deferred capex during diligence treat it as a direct reduction to enterprise value. Sellers who disclose it proactively, with a remediation plan, are in a far stronger negotiating position.

Stage 2 failures: NDA deficiencies, confidentiality breaches and poor buyer targeting

The NDA as an early indicator of deal quality

The NDA is the first legal document executed in a transaction. It is frequently one of the most carelessly drafted.

An effective M&A NDA requires counsel with active market knowledge: an understanding of what provisions the current market considers standard, what sophisticated financial and strategic buyers will accept, and where experienced buyers routinely push back. A properly drafted confidentiality agreement signals to buyers that the seller is well-represented, and buyers are less likely to use negotiating tactics they would try on unsophisticated sellers. A seemingly small mistake while negotiating and signing an NDA can close off critical options later in the process, such as having the NDA expire after six months or missing a clause that prevents solicitation of your employees (Morgan and Westfield).

Clauses frequently underspecified in poorly drafted NDAs include the non-solicitation of employees, the permitted-recipient list, the duration of confidentiality obligations and the prohibition on contacting customers, suppliers, and employees outside the approved deal team.

Buyers who refuse to negotiate their NDA at all present a different but equally serious problem. While sellers typically prefer broadly drafted provisions, buyers often seek to narrow the scope in order to preserve maximum flexibility. If that is not possible, many private equity buyers will frequently move on to the next opportunity, leaving the seller with one less bidder in the pool (Lexology). A seller who insists on wholly non-negotiable NDA terms risks losing qualified buyers at the very first contact point.

The complexity and number of issues at the NDA stage are a tiny fraction of what the parties will encounter as the deal moves forward. If you cannot solve the NDA and walk away, you have just saved yourself six months of hard work.

This observation, from experienced M&A Science practitioners, applies in both directions. A counterparty who is inflexible or unreasonable at the NDA stage is providing reliable early evidence of how they will behave at every subsequent stage of the process.

Confidentiality breaches and poor buyer targeting

Indiscriminate outreach to unqualified or financially unserious buyers wastes time and exposes sensitive information. If word gets out internally that the company is exploring a sale before it is done, employees start updating their resumes. Productivity drops. The business being sold starts losing value in real time (M&A Science). A curated, disciplined buyer outreach process is not a matter of preference. It is a material protective measure.

Stage 3 failures: valuation disconnect

The most persistent source of deal failure across every segment of the market is the gap between what sellers expect and what buyers will pay. Nearly 29 per cent of M&A terminations happen because the buyer and seller cannot agree on price or valuation (WinSavvy).

The dynamic is familiar. An owner who has built a business over 25 years is not pricing the past. A buyer is pricing the next five years of cash flow under their ownership. In the lower middle market, this valuation realism lag has been pronounced. Rapid swings in economic indicators make it harder for both sides to agree on a fair price, and buyers demand wider margins of safety, meaning lower multiples, especially for companies whose recent EBITDA has been trending down (Independent Investment Bankers Corp., 2025).

Sellers also consistently overestimate a buyer's willingness to pay for future potential they have not yet realized. Preliminary data room access at the IOI stage can itself surface early mismatches. When a buyer's preliminary review reveals discrepancies between the CIM narrative and the underlying financial data, the IOI process may stall before management meetings are ever held.

Stage 4 failures: LOI instability and seller ambivalence

An LOI agreed in principle but with too many material commercial issues left open is an invitation to re-trade. Because most LOI clauses are non-binding, a loosely drafted LOI means the commercial negotiation continues after exclusivity is granted, with leverage now firmly on the buyer's side. Earnout structures that are vague or unenforceable, working capital pegs that are undefined and LOI terms accepted without experienced M&A legal counsel all create the conditions for a deal that technically survives to due diligence but arrives there fundamentally unstable.

Owner emotional ambivalence is an equally serious issue at this stage, and one that is rarely discussed openly. Sellers get cold feet when they are not emotionally prepared to leave the company they built. Whatever the problem is, getting cold feet results in a lot of money, time and energy being spent for nothing, as most people back out at the very last moment (Consero). By the time an LOI is signed, some owners have already emotionally exited the business. Operational performance begins to slip. The business the buyer agreed to buy starts to change.

Stage 5 failures: due diligence, buyer governance approvals and performance during the process

Diligence surprises: where most deals die

Due diligence is where the greatest number of deals that have survived to LOI ultimately break down. According to Bain's 2020 Global Corporate M&A Report, more than 60 per cent of executives identify poor due diligence as the main reason for deal failure. Surprises are the primary mechanism: undisclosed liabilities, customer or supplier concentration, key-person dependence, ongoing litigation not flagged in advance, and inconsistencies between what the CIM represented and what the data room actually contains. A poorly prepared information memorandum forces buyers to fill information gaps with conservative assumptions, which compress their bids (M&A Institute). Every gap discovered at the due diligence stage becomes negotiating leverage for the buyer.

For technology-reliant businesses, technical debt discovered during diligence that was not addressed before going to market is treated as a direct reduction to enterprise value. Technical debt, the cost to bring an acquisition's technology in line with expected performance and maintain it there, impacts the capital expenditure needs for buyers, which in turn impacts price (Plante Moran). For workforce-dependent businesses, hidden employment liabilities or undocumented non-competes discovered during HR due diligence introduce legal uncertainty and inflate the buyer's risk assessment.

Buyer-side governance approvals: an independent deal-killer most sellers underestimate

One of the most frequently overlooked sources of deal failure in the lower middle market is the requirement for the buyer to obtain its own internal approvals before a transaction can close. These approvals are entirely outside the seller's control, they run in parallel with due diligence, and each one represents an independent veto point.

In private equity and family office transactions, the deal team that negotiated the LOI does not have final authority. The investment committee, typically consisting of senior partners or principals, must formally approve the investment thesis, diligence findings and proposed terms. Investment committee rejections can occur even after extensive diligence if the committee has concerns about valuation, risk concentration, management team depth or strategic fit with the existing portfolio. In corporate strategic transactions, the buyer's board of directors must formally approve any material acquisition, adding a layer of scrutiny beyond the management team that ran the process. For any buyer financing the acquisition with debt, the lender must independently underwrite the transaction and obtain credit committee approval.

Deals that would have cleared credit committees without issue a few years ago are being turned down today. This is largely outside a seller's control, but it is a real risk in the current environment.

That observation from Middle Market Growth (2026) reflects a wider tightening across lender credit committees. High interest rates increase the risk of borrowers defaulting on their obligations; therefore, lender scrutiny and diligence increases. This stricter lending policy often results in longer waiting times for loan approval and lower overall approval rates (Koley Jessen).

Each of these bodies is an independent veto point. None of them are visible to the seller during the process. Any one of them can reject the transaction, impose new conditions, require price adjustments or introduce delays that put closing at risk. Before entering exclusivity, sellers should ask their buyer direct questions: which internal approvals are required, what is the timeline for each, and have the investment committee, board or lenders already been briefed. Incorporating realistic approval timelines into the LOI's exclusivity period is not a minor administrative point. It is a material risk-management decision.

Business underperformance during the process: a deal killer hiding in plain sight

A formal sell-side process runs nine to 12 months. The demands of managing that process are substantial. The buyer will typically have 500 questions or more for the seller, and 30 to 50 people may come in to perform due diligence on the target company. This causes massive stress and distraction to the seller and can seriously affect normal business operations (DealRoom). When management attention is on the deal, it is not on customers, staff, operations and business development. Revenue can soften. Key relationships can go unmanaged.

External shocks add a further layer of uncontrollable risk. The COVID-19 pandemic in 2020, the supply chain disruptions of 2021 and 2022, and the U.S. tariff actions of 2025 all interrupted active Canadian sale processes and forced buyers to re-trade price or walk away. When a buyer discovers during due diligence that the business has underperformed its CIM figures since the IOI was submitted, they have grounds to re-trade price, impose an earnout or terminate. Buyers are cautious when a company shows inconsistent earnings, shrinking margins or unexplained performance swings. Even if recent results are strong, a history of erratic performance creates skepticism. Buyers seek patterns and predictability (Versailles Group).

The solution is not to avoid running a sale process. It is to structure the management team and the process timeline so that business-as-usual operations are protected throughout.

Stage 6 failures: the deal that dies on the one-yard line

Deals that survive to the purchase agreement stage still fail. Negotiations over representations, warranties and indemnity terms expose obligations that were not adequately scoped in the LOI. Closing adjustment disputes, working capital true-up disagreements and escrow holdback negotiations left undefined at the LOI stage become late-stage pressure points.

Mismatched expectations around value and deal terms are cited most often as the specific reason for termination at this stage (McKinsey). In the lower middle market, the more common equivalent is a gap between what the owner understood was agreed in the LOI and what the definitive purchase agreement actually requires.

Personal chemistry and trust carry disproportionate weight at this stage. One experienced M&A practitioner has described a transaction that was supposed to close in January finally reaching the finish line in March, after nine months of work and two months of delays, surviving only because both parties genuinely liked each other and the opportunity was compelling (Middle Market Growth, 2026). In the lower middle market, the relationship between buyer and seller is not a soft variable. It is a material determinant of whether the deal closes.

Eight reasons deals break: a summary

The stage-by-stage analysis points to eight structural failure drivers, most of which are preventable.

Seller unpreparedness, including incomplete financial records, no QofE report and no business readiness assessment.
Inadequate sector-specific pre-market assessments, including the absence of IT readiness, human capital or capital asset reviews for businesses in which these are material.
Relative underperformance versus peers on key financial metrics, which narrows the buyer pool and compresses multiples.
NDA deficiency or counterparty inflexibility at the NDA stage, which introduces confidentiality risk and signals broader negotiating difficulty.
Valuation disconnect between owner expectation and market reality.
Buyer financing and governance approval failure, including insufficient vetting of the buyer's internal approval pathway before exclusivity is granted.
Business underperformance during the process, whether through management distraction or external shocks.
Due diligence surprises and process fatigue, including undisclosed or undiscovered issues that produce price re-trades or termination.

What owners and advisors can do

The protective actions that follow from this analysis are equally direct.

Begin preparing 12 to 24 months before going to market. Commission a QofE report and a business readiness assessment. Identify and address legal and compliance issues before buyers find them. Sellers who run due diligence on themselves before going to market reduce surprises, speed up the buyer's process and arrive with a more accurate sense of what their business is worth (M&A Science).

Identify the sector-specific assessments your business requires. If operations depend meaningfully on technology infrastructure, commission an IT readiness assessment. If the workforce is a significant source of value or risk, commission a human capital or labour review. If the business is capital-intensive, obtain independent appraisals of major capital assets and document your maintenance and capital expenditure history. These assessments reframe risk as disclosed and managed, rather than leaving buyers to discover and price it themselves.

Benchmark your financial performance against sector peers before going to market. If you are below the midpoint on key metrics, address those gaps or enter the process with a thoroughly advisor-calibrated expectation of price and buyer pool. Insist on M&A-experienced legal counsel for the NDA and for every subsequent stage of the process. Engage that counsel before the LOI, not after. Understand the difference between binding and non-binding LOI provisions, and negotiate key commercial terms as precisely as possible before entering exclusivity.

Before entering exclusivity, ask your buyer direct questions about their internal governance approvals. Which bodies must approve this transaction? What is the timeline for each? Has the investment committee, board or lender been briefed, and what conditions have been attached? Incorporating realistic approval timelines into the LOI's exclusivity period is a material risk-management decision, not a scheduling detail.

Choose a sell-side advisor with a demonstrated Canadian lower-middle-market track record and a structured, confidential process. Protect business performance during the process by delegating operational responsibilities deliberately before launching. Identify who will run the business while you are occupied with the sale, and monitor performance throughout. If an external shock disrupts performance mid-process, address it transparently with your advisor rather than hoping the buyer will not notice at due diligence.

Address Canadian tax planning, including the choice between share and asset purchase, the availability of the lifetime capital gains exemption and the treatment of earnout payments, before signing anything. Manage your own emotional readiness with the same care you would apply to your financial preparation. Owner ambivalence at the wrong moment is one of the most costly and least discussed causes of deal failure in the lower middle market.

The deal worth doing is the deal that closes

A failed deal is not a neutral outcome. It consumes months of management time. It exposes confidential business information to buyers, competitors and the market. It demoralizes employees and key staff who may have sensed that something was changing. It frequently leaves the owner in a weaker position for any future attempt to sell.

The evidence on lower-middle-market M&A is clear and consistent: the majority of transactions that begin a formal process do not close. The primary reasons are predictable and, in most cases, preventable. The antidote is preparation, qualified professional guidance and a realistic understanding of how the process actually works before it begins. Owners who invest in getting ready before going to market close more deals, on better terms, in less time.

Selling Your Canadian Business

For a comprehensive guide to the sell-side process in the Canadian context, including the legal, tax and advisory framework specific to Canadian business owners, see Selling Your Canadian Business: A Step-by-Step Guide to Maximizing Value and Securing Your Legacy by Karl E. Sigerist, Jr., ICD.D (January 2026), available at sellingyourcanadianbusiness.com and Amazon.ca.

About the author

Karl E. Sigerist, Jr., ICD.D, is President and CEO of The Shaughnessy Group and the author of Selling Your Canadian Business: A Step-by-Step Guide to Maximizing Value and Securing Your Legacy. He has been a founding member of eight companies and advised on transactions worth billions of dollars over a 30-year career. The book is available on Amazon.ca. Connect with Karl on LinkedIn.

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