Sixty-nine percent of signed LOIs never close.
That number comes from the ETA community's own data. Searchers find a business, get into exclusivity, sign a letter of intent — and then watch the deal fall apart. Three months in. Five months in. Sometimes at the wire.
Most buyers blame the seller. The seller got cold feet. The seller changed the terms. The seller's lawyer killed it.
That's not what happened. What happened is that due diligence found something the buyer should have found earlier, or the buyer found something they weren't equipped to evaluate. Either way, the failure traces back to process.
In EOD, we have a phrase for this: you don't check a device 50% of the way through. You either clear it or you don't. There's no partial credit.
Due diligence in a search fund acquisition works the same way. You either know what you're buying, or you don't. And if you don't, you find out on closing day when a mystery liability appears and the deal dies on the table.
Here's what experienced operators actually check — and what most first-time buyers skip.
The five threat vectors
Every acquisition target has five threat vectors. You work through them in order. If any vector is unacceptable, you stop. You don't continue hoping the other four compensate.
Financial quality. The seller's stated EBITDA is a starting point, not a fact. Quality of Earnings analysis is the job. A QoE review takes approximately five weeks and typically surfaces a 5-20% gap between stated EBITDA and actual normalized earnings.
That gap matters at a 6x multiple. A $500,000 EBITDA overstatement on a business priced at $3 million is not a rounding error — it's the entire deal thesis.
What experienced buyers look for: add-backs that aren't defensible, owner compensation that's below-market (meaning you'll pay more once you're running it), working capital trends over 24 months, and accounts receivable aging over 60 days. Receivables older than 60 days are a signal about customer relationships, not just cash flow.
Revenue concentration. No single customer should represent more than 10-15% of revenue. If one does, you don't own a business — you own a contract. The moment that customer renegotiates or leaves, your EBITDA goes with it.
Sellers disclose this reluctantly. The question to ask is not "what's your biggest customer?" It's "walk me through every customer who's changed their spend with you in the last 24 months." The pattern in the answers tells you more than the number.
Contractual revenue matters. A business with 60%+ of revenue under multi-year contracts is a different asset than one where 90% of revenue is transactional. Price accordingly.
Key-man risk. Research from the ETA community suggests that cultural and key-man mismatches account for 60-70% of post-acquisition underperformance. Not financial underperformance — operational collapse. The seller leaves, the team follows, the customer relationships dissolve.
The test: spend three days on-site before you're deep in the financial weeds. Watch how the team interacts. Note who every customer calls when they have a problem. If the answer is always the owner's name, that's the risk profile you're assuming.
Key-man risk in a healthy business is transferable. The owner should be able to describe a transition plan, introduce you to the team, and step back from customer relationships during the exclusivity period. If they won't, or can't, that tells you everything.
Legal and structural. This is where acquisitions die quietly. Not dramatically — quietly.
The most common legal landmines: sales tax non-compliance (the business has never collected, or collected and not remitted — you inherit the liability), licenses that don't transfer with the entity, lease assignments that require landlord consent (which landlords use as leverage at the worst possible time), and IP that lives in the owner's personal name rather than the company.
SBA financing, which funds most search fund acquisitions in the lower-middle market, requires clear, transferable ownership. Any ambiguity in entity structure adds weeks to closing and can kill SBA approval entirely.
Run entity searches in every state where the business operates. Get the landlord consent in writing before you're 30 days from closing. Confirm every license transfers.
Financing timing. The average LOI-to-close timeline in search fund acquisitions is 5.6 months. SBA-financed deals specifically run 60-120 days from LOI to close. That timeline is built into the bank's process — it is not negotiable.
Sellers who want to close in 45 days can't do it with SBA financing. If you're using SBA, the seller needs to understand and accept that timeline at the LOI stage. Not three months in. At the LOI stage.
What the numbers actually mean
The average searcher signs 3.2 letters of intent before successfully acquiring a company. That's not failure — that's the process working correctly. You sign the LOI to get into exclusivity and run real diligence. Sometimes diligence surfaces a problem the deal can't survive. That's not a loss. That's how you avoid buying the wrong business.
The [Stanford Search Fund Study](https://www.gsb.stanford.edu/experience/about/centers-institutes/ces/research/search-funds) consistently shows that approximately 63% of completed searches result in a successful acquisition. Average search duration: 19 months. Most successful closes happen in months 18-24.
That timeline data matters for two reasons. First, if you're in month 12 and haven't found the right business, you're not behind — you're on schedule. Second, the pressure to close after a long search is the single biggest driver of bad acquisitions. Operators who close a deal they shouldn't because they're tired of searching produce most of the ETA failure stories.
The decision to walk from a dead deal is not a setback. It's the process protecting you.
For a broader look at how search fund economics compare to traditional private equity, see our piece on [search fund vs. private equity: what operators actually choose](/blog/search-fund-vs-private-equity).
What experienced operators do differently
First-time buyers run diligence in sequence. Experienced operators run it in parallel and stage it.
Phase one: financial confirmation. Before you spend $40,000-$100,000 on full professional diligence — QoE, legal, environmental, commercial — confirm the revenue is real and the customer concentration is acceptable. You can do this with three years of tax returns, QuickBooks data, and a handful of customer calls. This takes two to three weeks. If phase one fails, you've spent almost nothing.
Phase two: full workstreams. QoE from a professional firm, legal review, commercial diligence on industry dynamics, and structural review for financing. These run in parallel, with weekly check-ins across workstreams. Problems that surface in one workstream usually have implications in another.
Phase three: investor deliverables. If you're raising a traditional search fund, your investors have specific documentation requirements. Know what they are before you start. An investor information request after you're already in exclusivity creates pressure on a timeline that's already tight.
The 100-day operating plan belongs in this phase, not after close. Experienced acquirers have a detailed post-close plan written before the deal is done. The plan shapes what questions they ask in diligence. It forces clarity on exactly what the business needs from a new operator — and whether you're the person who can deliver that.
The operator's opinion
Due diligence is not a compliance exercise. It's not about generating paper to satisfy a process. It's about building genuine conviction that the business you're buying can be operated profitably by someone who isn't the current owner.
That conviction either exists at the end of diligence, or it doesn't. If it doesn't, you don't close. You lose the earnest money, you lose the time, and you learn something that makes you sharper at the next deal.
The searchers who struggle are the ones who treat diligence as a hurdle to clear rather than a decision to make. They find a problem, rationalize it, and close anyway. Then they spend two years fixing something they saw coming.
The ones who succeed treat every finding as signal. Not necessarily a deal-killer — but something that requires an explanation, a price adjustment, or a structural protection. And if the explanation isn't satisfying, they walk.
That discipline, applied consistently across 3.2 LOIs, produces the kind of acquisition the Stanford data actually rewards.
The deal is only as good as what you knew going in.
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*Jonathan Bates is a partner at Patriot Growth Capital and a former U.S. Navy EOD officer. PGC acquires and operates lower-middle-market businesses alongside veteran operators trained for ownership.*
