Why Deals Fall Apart: Price Disagreements Now Outrank Diligence Findings

Ask most business owners what they fear in a sale process and they will point to due diligence: the buyer's accountants finding something in the books. The latest lower middle market data suggests the bigger risk sits somewhere less dramatic. According to Axial's 1H 2026 report, the leading reason deals failed to close in 2025 was valuation expectations, cited by 28.3 percent of advisors surveyed, narrowly ahead of diligence findings at 24.5 percent.

The Number One Deal Killer Is the Price Conversation

That ranking deserves a moment of attention. More transactions died over price disagreements than over anything buyers actually discovered during diligence. The data room, the quality of earnings review, the customer calls: all of it turned up fewer fatal problems than the simple question of what the business is worth.

This is not because diligence has become easy. It is because the valuation conversation has become harder. Sellers who watched peers command strong multiples in 2021 often anchor on those numbers, while buyers price off today's cost of capital and today's growth outlook. When the two sides start far apart, no amount of clean financials closes the distance.

The encouraging news is that the gap is narrowing. Axial's survey found seller sentiment remains "opportunistic, but cautious," the description chosen by 61.5 percent of advisors. But the share of sellers pausing their processes fell to 6.4 percent, down from 15.8 percent in mid 2025, and the share of eager sellers nearly doubled to 19.2 percent. Sellers are recalibrating through market feedback rather than sitting out. Deals are getting done: 58.6 percent of advisors reported closing more than half of the processes they ran in 2025, including 27.2 percent who closed over three quarters.

Why the Gap Persists Even as the Market Improves

The headline M&A market looks strong. Announced transactions reached roughly $2.8 trillion globally in the first half of 2026, up 48 percent from the same period last year and the strongest first half on record. But that strength is concentrated in large transactions. In the lower middle market, conditions have improved more modestly, and pricing discipline remains firmly in place.

Three forces keep the valuation gap open. First, anchoring. An owner who received an unsolicited indication of interest in 2021 tends to treat that number as the floor, even though financing costs and buyer underwriting standards have changed since. Second, the difference between the owner's EBITDA and the buyer's EBITDA. Buyers underwrite off adjusted, normalized earnings: after a market-rate salary for the departing owner, after removing one-time revenue, after normalizing working capital. That figure often lands 10 to 20 percent below the number the owner has in mind, which compounds into a much larger gap once a multiple is applied. Third, interest rates. Most lower middle market deals still use debt, and lenders size loans off cash flow. When borrowing costs stay elevated, buyers cannot pay 2021 prices and still hit their return targets, no matter how much they like the business.

None of these forces is a judgment on the quality of any particular company. They are arithmetic. Sellers who treat them as arithmetic, rather than as an insult, tend to fare better.

What Buyers Are Actually Paying

Multiple data helps ground the conversation. Capstone Partners' Middle Market M&A Valuations Index put average deal pricing at 9.8 times EV/EBITDA in 2025, up from 9.4 times in 2024 and 9.0 times in 2023. That average covers the full middle market and skews toward larger, higher-quality transactions. In the lower middle market, multiples vary widely by industry: home services businesses commonly trade between 4 and 6 times EBITDA, manufacturing between 5 and 7 times, healthcare services between 5 and 9 times, and professional services between 4 and 7 times. Software remains the outlier, with mission-critical B2B products commanding 8 to 15 times.

Expectations for the balance of 2026 are steady rather than exuberant. A clear majority of advisors surveyed, 61.9 percent, expect multiples to hold at 2025 levels, while 27.4 percent expect some increase. Half of Axial's respondents expect closing conditions to remain about the same this year, and 32.1 percent expect an easier path.

For an owner, the practical takeaway is that the market has stabilized around a new normal. Waiting another year in the hope of a return to 2021 pricing is a bet against three consecutive years of evidence.

A More Crowded, More Varied Buyer Pool

One genuine positive for sellers: there are more buyers, and more kinds of buyers, than at any point in recent memory. Axial recorded 2,635 new buyers joining its platform in 2025, an all-time high and a 36 percent increase over the prior year. Private equity funds and independent sponsors no longer dominate the way they once did. Search funds, family offices, holding companies, and strategics have all grown their share of lower middle market activity. US private equity dry powder alone stood at roughly $1.13 trillion through June 2026.

Buyer demand is also unevenly distributed across sectors, which matters for pricing. Industrials currently lead both deal volume and buyer interest. Business services ranks second in buyer interest but only sixth in deal volume, meaning demand in that sector meaningfully exceeds the supply of companies coming to market. Owners of business services firms who run a genuinely competitive process are positioned to benefit from that imbalance.

How Sellers Close the Gap Before It Opens

The deals that close tend to share a pattern: the seller settled on a defensible number before going to market, not during negotiations. That work happens in three steps.

Start with a third-party valuation grounded in current comparables, not in remembered peak pricing. An independent read on the range gives the owner a reference point that does not move when the first offer arrives.

Then get to the buyer's EBITDA before the buyer does. A sell-side quality of earnings review identifies the adjustments a buyer will make, from owner compensation to non-recurring items to working capital normalization, so the marketed number survives diligence intact. When the seller's number holds up, price renegotiation loses its usual foothold.

Finally, decide in advance where flexibility lives. If a gap remains at the negotiating table, structure can bridge part of it: a portion of price contingent on future performance, or rolled equity in the buyer's entity. Structure works best as a planned concession, not an improvised one.