This working paper examines post-LOI price adjustment patterns across lower-middle-market transactions and identifies the preparation gap as the primary driver of value erosion between signed LOI and close.
73% of LMM transactions include at least one post-LOI price adjustment, averaging 18% of enterprise value. Primary driver: information asymmetry, not market conditions.
Key Findings
QoE restatements appear in 45% of transactions, averaging 8 to 12% of enterprise value impact. These restatements are not errors. They are the buyer's underwriting model applying a different lens to the same financials the founder has been running the business on for years.
Customer concentration above 40% triggers a mechanical 0.8x to 1.2x EBITDA discount in PE underwriting models before the first meeting. This is not a negotiation tactic. It is a structural feature of how institutional buyers price risk in the lower-middle-market.
The upstream window, 12 to 24 months before a banker is engaged, is the only period in which preparation materially changes outcomes. Once the process begins, the buyer's model is already running and the price adjustments it produces are structural, not negotiable.
Related Papers
The Preparation Gap opens a four-paper sequence. WP-002, The Buyer Lane Preparation Map, disaggregates this gap across active buyer archetypes. WP-003, The Deal Certainty Discount, describes the compression that forms after the letter is signed. WP-004, The Preparation Frontier, asks what an owner with a finite budget should fix first.
Key takeaways
- Different buyers apply fundamentally different models to the same business. The spread can reach two to three turns of EBITDA.
- The 40% concentration threshold triggers a mechanical PE discount before the first conversation. It is structural, not negotiable.
- The upstream window is the only period in which preparation materially changes outcomes.
Research led by Ron Smith, CM&AA®, Founding Partner of Cordis Global and Head of Research at the Cordis Institute.
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