The Diligence Item Nobody Tracks

Axial published its Dead Deal Report on 2025's broken LOIs earlier this year. Seventy-five transactions that reached a signed letter of intent and died before closing, sorted by cause.

The breakdown:

• Non-QoE diligence findings — 25.3%
• QoE EBITDA discrepancies — 21.3%
• Renegotiation challenges — 14.7%
• Seller decisions — 13.3%
• Financing constraints — 10.7%
• Business underperformance — 8.0%

Those are the six leading causes; a remaining fraction landed in "other." Combine the top two and 46.6% of these deals died on something diligence turned up after both sides had already agreed on a price.

The report does not mention fixed asset schedules. It does not mention equipment. It does not mention capital expenditure history or deferred maintenance. Read it end to end and the machinery the business runs on never appears as a category.

That is not a criticism of Axial. Their sample is what respondents reported, and respondents report in the vocabulary of the diligence workstreams they run — quality of earnings, legal, commercial. Asset problems get absorbed into "non-QoE diligence findings" and "financing constraints," where they stop being visible as their own category.

They are still there. They just don't get counted, which means they also don't get prepared for.

The number underneath the problem

The IBBA and M&A Source Market Pulse survey for the second quarter of 2026 asked advisors how much exit planning their sellers had completed before coming to market.

Across five deal-size segments, between 60% and 90% of sellers had completed less than one year of exit planning, or none at all.

Retirement was the leading motivation in every segment — 45% at the smallest end, peaking at 72% in the $1 million to $2 million market. So these are not opportunistic sellers reacting to an unsolicited offer. These are owners who knew for years this was coming and arrived anyway with a business assembled for operating, not for selling.

Same survey: Main Street deals took six to ten months to close. Lower middle market took eleven to twelve. The $2 million to $5 million segment moved from nine months to 11.5 months in a single year — the largest increase in the survey.

An owner with no preparation and an eleven-month process is not going to fix anything mid-deal. Whatever the asset records look like on the day the LOI is signed is what the buyer's lender is going to underwrite.

What the lender is actually doing with your equipment

This is where the asset schedule stops being a bookkeeping question.

BizBuySell's second-quarter 2026 survey found 78% of buyers expect to finance the acquisition with SBA-backed lending — nearly eight in ten. So for most owners reading this, the buyer's capacity to pay is set inside SBA collateral rules, not by what the buyer thinks the business is worth.

The same survey found 52% of owners have an exit plan. Only 14% have obtained a professional valuation.

SBA SOP 50 10 8.1, effective October 1, 2026, states the equipment rule three separate times:

"Used or existing machinery and equipment (excluding furniture and fixtures) at a maximum of 50% of Net Book Value or 80% with an Orderly Liquidation Appraisal minus any prior liens."

Read that twice.

Absent an orderly liquidation appraisal, the lender recognizes half of net book value. Net book value is original cost minus accumulated depreciation — an accounting entry that reflects a depreciation schedule chosen years ago for tax purposes. It has nothing to do with what the equipment would bring.

With an OLV appraisal, recognized collateral moves to 80% of appraised orderly liquidation value.

On an operation running well-maintained iron that was aggressively depreciated — which describes most manufacturing, construction, and service businesses with real equipment — those two numbers are not close. A machine fully depreciated to zero contributes nothing at 50% of net book value. The same machine appraised at $180,000 orderly liquidation contributes $144,000.

Multiply that across an equipment list and the difference determines how much of the purchase price the buyer can borrow against.

The same SOP carries the trigger that puts an appraiser in the room at all:

"If the valuation of fixed assets exceeds Net Book Value, the Lender must obtain an independent appraisal by a qualified individual to support the higher valuation."

No dollar threshold underneath it. Any claim above net book value requires independent support.

Where the money actually leaks

Four things surface during diligence on almost every unprepared asset schedule. None of them are exotic. All of them are fixable a year out and none of them are fixable in week three of exclusivity.

Ghost assets. Equipment scrapped, traded, or sold years ago still carried on the schedule. The buyer's team walks the floor, can't find it, and now every other line on the schedule is suspect. The problem is not the missing asset. The problem is that the schedule has stopped being evidence.

Unrecorded assets. The reverse, and more expensive. Equipment bought and expensed, major rebuilds capitalized nowhere, upgrades installed and never recorded. This is real collateral the seller owns and gets no credit for, because there is no document that proves it exists.

Undisclosed liens. A piece of equipment already pledged against a line of credit or an old equipment note, still counted as free collateral in the deal model. This one gets found. UCC searches are cheap and lenders run them.

Deferred maintenance. Not a disclosure problem — a valuation problem. Condition drives orderly liquidation value. An operation that stopped spending on maintenance in the two years before going to market shows it in the equipment, and the appraised number reflects it.

The first three are records problems. The fourth is an operating decision made years before anyone thought about selling.

Why a records problem becomes a price problem

The Pepperdine Private Capital Markets Report for 2026 asked investment bankers what killed transactions. The valuation gap between buyer and seller was the most commonly cited cause, and the most commonly reported gap was 11% to 20% of the seller's asking price.

Eleven to twenty percent. That is the range that ends deals.

An asset schedule that can't be verified doesn't create a 50% argument. It creates exactly the kind of gap Pepperdine is describing — the buyer's lender advances less than the model assumed, the buyer asks the seller to close the difference, and a deal that survived nine months of process dies over a spread that a year of records work would have closed for the cost of the work.

Customer concentration behaves the same way. Be careful with the numbers in circulation on this one: the widely quoted 10% to 30% discount range is practitioner convention, not a finding derived from transaction data, and the peer-reviewed work that does exist — Patatoukas in The Accounting Review, Dhaliwal and others in the Journal of Accounting and Economics — measures cost of capital and profitability in public companies, which is a different question. What is consistent across practitioners is the shape: a single customer above roughly 20% of revenue starts compressing the multiple, and above 40% it starts affecting whether the deal gets financed at all. Either way it is a two-to-three year fix, not a diligence fix.

Two identical buildings

Two identical facilities on the same road, both for sale.

The first has been inspected and repaired, the yard is cleaned up, the asset schedule reconciles to what's actually on the floor, every machine has its manual and its service history in a file, and the owner has already moved his personal vehicles off the property.

The second is operating. Average yard, some known issues, a stack of paperwork on the owner's desk, and an equipment list that was last reconciled during an audit four years ago. The owner needs to move.

Both buildings are worth the same. They will not sell for the same, and the difference is not a negotiating outcome. It is the buyer's advisors pricing what they cannot verify.

What preparation actually looks like

Grooming is not a consulting product. Most of it is work the owner does, and the reason smart operators do it themselves is that it's cheaper, it adds more at closing than it costs, and it removes the leverage a buyer gets from a question the seller can't answer.

On the asset side, the list is short:

Reconcile the schedule to the floor. Walk it with the schedule in hand and mark every line either present, gone, or unrecorded. Write off what's gone. Get what's unrecorded documented and capitalized properly.

Pull the UCC filings yourself. Every lien against every asset, current status, and payoff. Find them before the buyer's lender does.

Build the asset file. Warranties, install documents, manuals, service history, major rebuild records, hour meter readings. This is the documentation an appraiser needs to develop a defensible number, and it's the documentation a buyer needs to believe it.

Fix the maintenance you deferred. Two years before market, not two months.

And know the number before anyone else does. An owner who walks into a sale process already holding a current, independently developed equipment value is negotiating from evidence. An owner who finds out what his equipment is worth from the buyer's appraiser is negotiating from someone else's report.

The honest part about timing

The IBBA data says most sellers give this less than a year. Twelve months is roughly the floor for the asset side alone — a full reconciliation cycle, one clean year of properly recorded capital expenditure, and enough runway to fix deferred maintenance without it reading as a pre-sale cosmetic push.

Concentration and owner dependency take longer. Three to five years is the realistic window for a business where the owner is still the primary relationship holder or where one customer carries a third of revenue.

That timeline is not an argument for waiting. It is an argument for starting the part that has the longest lead time first, which for most equipment-intensive businesses is the asset records, because they can be worked on quietly, they don't require telling anyone the business is for sale, and they hold their value if the sale gets pushed three years.

Nothing about this improves by being handled during exclusivity.

Sources

• Axial, Dead Deal Report: Unpacking 2025's Broken LOIs — 75 transactions
• IBBA and M&A Source, Market Pulse Survey, Q2 2026
• BizBuySell, Insight Report, Q2 2026
• Pepperdine Graziadio Business School, 2026 Private Capital Markets Report (investment banker respondents, n=43)
• U.S. Small Business Administration, SOP 50 10 8.1, effective October 1, 2026

About the author

Nathan Bazzle, MCMEA, CSBA, holds the Master Certified Machinery and Equipment Appraiser designation — one of 26 in the U.S. — with 20+ years and more than 900 engagements across mining, oil and gas, aggregate, heavy construction, and manufacturing. His appraisal and expert witness work runs through BAZZLE, serving lenders, attorneys, trustees, and industrial operators nationwide.

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