Sixty-nine percent of signed letters of intent in search fund acquisitions never close. You read that right. More than two out of three deals that reach the LOI stage fall apart before anyone makes it to the closing table.
That number comes from Jim Stein Sharpe, one of the most experienced ETA coaches in the field. It's consistent with what practitioners see across hundreds of transactions. And it explains why experienced searchers budget $50,000 per failed deal — not as pessimism, but as operational math.
The LOI is not the finish line. It is not even the starting gun for due diligence. Understanding what it actually is changes how you draft it, when you sign it, and how much it costs you when it falls apart.
What the LOI actually represents
A letter of intent in an ETA acquisition is a conditional offer. It establishes the deal economics your investors and lenders agreed to support, locks in an exclusivity period so you can conduct formal diligence without competing bidders, and signals to the seller that you're serious enough to move forward under defined terms.
It is not a binding purchase agreement. It is not a license to discover whether you want to buy the business.
The Yale School of Management case on search fund due diligence, published by Jacobs and Wasserstein in 2022 and available at Yale SOM, makes this distinction as clearly as anything written on ETA transactions: "Buyers who treat DD as discovery extend timelines, blow through budgets, and frustrate sellers. Buyers who treat DD as confirmation close on time at predictable cost."
If you're still figuring out whether you want to buy this business when you sign the LOI, you're signing too early. That mindset is the source of most deal failures.
The two-phase framework that actually closes deals
The framework that consistently produces closings is built around two distinct phases separated by the LOI.
Phase 1: Preliminary diligence, before the LOI. This is where you conduct your own informal financial analysis, verify the business thesis, check license transferability, and assess whether the seller is genuinely committed to exiting. Your Phase 1 findings inform the terms you put in the LOI. You do not spend $15,000 on a Quality of Earnings report in Phase 1. You use your own judgment, your investors' pattern recognition, and available data to decide whether this deal deserves a formal commitment.
Phase 2: Confirmatory diligence, after the LOI. Once exclusivity is signed and your lender has expressed interest, you commission the QoE, engage legal counsel, and begin the formal workstreams. The purpose is not to discover the deal thesis. It's to confirm what you already believe to be true, or to find reasons to walk away with as much information as possible before exclusivity expires.
Most LOI failures trace back to one mistake: using Phase 2 diligence to do the work that should have happened in Phase 1.
What belongs in a search fund LOI
The core terms that should be settled before you put ink to paper:
- Purchase price and structure. Enterprise value, proposed debt/equity split, any seller financing component. The Stanford GSB 2024 Search Fund Study reports a median purchase price of $14.4 million across all U.S. and Canadian search fund acquisitions, with a median EBITDA multiple of 7.0x. Your deal will differ. But you need a number both parties accept before exclusivity begins.
- Working capital peg. Normalize it based on a 12-24 month trailing average. This is where many late-stage disputes originate. Settle the methodology in the LOI, not at closing.
- Exclusivity period and length. The single most important structural term. More on this below.
- Transition terms. How long the seller stays post-close, at what compensation, and what constitutes a completed handover. Standard duration is 60-180 days; total cost typically $15,000-$75,000.
- Earnout structure, if applicable. If you're paying a premium based on future performance, define the metrics, timeframe, and calculation methodology precisely. Vague earnout language produces disputes at the worst possible moment.
- Financing contingency. LOIs for SBA-financed deals should specify the contingency clearly. If the SBA loan doesn't close, the deal doesn't close. Make it explicit.
Exclusivity: why 45 days almost always fails
The most common structural mistake in search fund LOIs is a 45-day exclusivity period on a deal that requires SBA financing.
Walk through the SBA timeline. Third-party valuation takes 2-3 weeks. Environmental review depends on business type. Lender credit approval runs 2-3 weeks minimum. SBA guaranty processing is a separate track running in parallel. That's before legal diligence, QoE, customer interviews, and the closing conditions list.
A Quality of Earnings report takes an average of five weeks. Legal diligence for a typical lower-middle-market service business takes 6-8 weeks when it runs smoothly. Industry data across ETA transactions shows an average LOI-to-close duration of 5.6 months. Not 45 days.
When exclusivity expires before closing, you need the seller's cooperation to extend. Sellers who've been watching their business sit in limbo for three months have leverage they didn't have on day one. Some walk. Some renegotiate price. Neither outcome is good.
Request 90-day exclusivity with provisions for a 30-day extension. For deals with SBA financing or known complexity, consider 120 days from the start. A seller who won't grant adequate exclusivity on a deal with genuine financing requirements is telling you something about how the rest of the transaction will go.
The math on broken deals
Before you sign an LOI, understand what losing this deal will cost you.
The standard guidance from experienced search fund advisors: budget $50,000 per failed LOI. Here's where that number goes:
| Workstream | Typical Cost | Notes |
|---|---|---|
| Legal diligence / counsel | $15,000–$25,000 | Sunk cost at LOI breach |
| Quality of Earnings report | $15,000–$35,000 | Non-recoverable regardless of deal outcome |
| Commercial diligence / customer interviews | $0–$15,000 | Depends on third-party engagement |
| Opportunity cost of search time | 4–8 weeks minimum | Extends average search duration |
The Stanford 2024 data shows searchers sign an average of 3.2 LOIs before closing a deal. That means most searchers absorb two or three broken deals. At $50,000 each, that's $100,000-$150,000 in direct costs on top of a 19-month average search duration.
This is why the cardinal rule exists: never commission a Quality of Earnings report until exclusivity is signed and bank interest is confirmed in writing. Spending $25,000 on QoE before exclusivity is operational malpractice. The seller has every incentive to continue shopping other buyers while your diligence clock runs.
The operator parallel
EOD clearance protocol runs in a defined sequence for a reason. You identify the device, assess the threat, clear the area, and then commit to the render-safe procedure. You don't start pulling wire before you know what you're pulling. The cost of reversing that sequence is not a financial loss. It's a different kind of loss entirely.
The LOI functions the same way in an acquisition. It's the moment you commit to the procedure. Phase 1 is your threat assessment. Signing the LOI is the decision to clear the area and move forward. Phase 2 confirmatory diligence is the render-safe procedure: methodical, documented, running in parallel workstreams with defined timelines.
When operators treat the LOI as the beginning of their investigation rather than the transition between assessed risk and managed risk, deals die. Not always from catastrophic failure. More often from timeline pressure, seller frustration, and exhausted exclusivity that forces renegotiation from a weakened position.
The structure of entrepreneurship through acquisition rewards operators who front-load their judgment. The LOI is not the place to figure out whether you want to buy this business. That decision should be made, and defensible, before you put the offer in front of the seller.
One mistake that compounds everything
There's a behavioral pattern that shows up consistently in failed deals: signing the LOI before confirming the seller genuinely intends to exit.
Sellers who are ambivalent about selling aren't irrational. They built something over decades. Walking away from it is genuinely difficult. But ambivalent sellers stretch timelines, re-trade terms, go dark on document requests, and walk away after your exclusivity has expired and you've spent $40,000 on QoE and legal.
Evaluate seller behavior as a proxy for deal health. A seller who returns every document request within 24 hours, shows up to every scheduled call, and doesn't need to be followed up on is signaling readiness. A seller who is consistently slow, vague about reasons, and takes 7-10 days to respond to basic financial document requests is signaling doubt.
You cannot force a seller to be ready. You can choose when to commit.
What actually closes deals
Before signing any LOI, verify three things in Phase 1: that the business's financial story holds at the informal level, that the seller is genuinely committed to exiting, and that your lender has expressed interest in the deal structure. None of these require spending $25,000. All three materially reduce the probability you end up in the 69% that never closes.
In the LOI itself, fight for adequate exclusivity, settle the working capital methodology, and specify transition terms with precision. Ambiguity in an LOI becomes a negotiation at the worst possible time: after exclusivity expires, after you've spent real money, and after the seller has regained their leverage.
The searchers who close efficiently are not smarter than the ones who don't. They run Phase 1 with the same rigor they apply to Phase 2, but without paying professional fees to do it. They treat the LOI as a commitment rather than an invitation. And they budget for deals that don't close, because most won't.
That discipline separates operators who close in 18 months from operators still searching at month 36.
Jonathan Bates is a partner at Patriot Growth Capital, a veteran-founded private equity firm focused on lower-middle-market acquisitions. He served as a U.S. Navy Explosive Ordnance Disposal officer.
