Close-Probability and Post-LOI Value Compression in Lower-Middle-Market Transactions
With the usual exception of the exclusivity and confidentiality provisions, a letter of intent binds neither party to the transaction. What it binds is the seller's optionality. Exclusivity periods have lengthened over the past several years (Goodwin, 2023). How often the process then fails is harder to state than practitioners suggest: the often-repeated figure that about half of signed letters do not close is a practitioner estimate, not a measured rate. The nearest survey evidence is engagement-level. The Pepperdine Private Capital Markets Report (2025) finds that close to a third of sell-side engagements end without a transaction, with a buyer-seller valuation gap the most cited reason.
Let H be the headline offer. With probability q the transaction fails and the seller realizes nothing; with probability one minus q it closes, and conditional on closing the seller realizes a fraction one minus c of the headline. Expected realized value is then, in reduced form, E[V] = (1 - q) x H x (1 - c). The Deal Certainty Discount is the gap between the headline and this value. The arithmetic is elementary; the contribution is the vocabulary it forces into view: an offer can fail outright, and a surviving offer is usually not paid in full. The two adjustments are not independent, because re-trading and outright failure are partial substitutes.
Research on the private bidding phase finds that higher and more aggressive initial offers tend to win the deal and to draw fewer subsequent revisions (Boone et al., 2024). That is how an aggressive bid secures exclusivity. Winning the bid is not closing it. Working-capital purchase-price adjustments now appear in more than ninety percent of private-target transactions (SRS Acquiom, 2025), and earnouts realize on the order of twenty cents on the dollar once non-paying deals are counted. Re-trading is widely reported to thrive in single-buyer processes and to struggle in competitive ones, so thinness of process, rather than the character of any buyer, is the better predictor of trouble.
The certainty discount is best read as half of a larger structure. WP-001 measured the total founder-to-close gap. WP-002 attributed part of it to buyer-lane divergence, settled before the letter is signed. The Deal Certainty Discount describes a second part that forms after signing. Framing the total as a pricing-stage component plus an execution-stage component is a proposition about where to look, not a measured identity. Because the arriving lane shapes both the anchored number and the later compression, the two leaks interact rather than simply add.
Three operational consequences follow. Preserve competition into exclusivity: a credible alternative, even a quiet one, is the strongest discipline on a buyer's incentive to re-trade. Price specificity as a feature: committed financing, a stated investment-committee posture, and a short, concrete diligence list are evidence of a low failure probability and deserve weight against a higher but vaguer headline. And ask how likely, not how high: rank offers by expected realized value, because the parties paid on close do not carry the cost of a deal that fails.
The probability of close is the load-bearing parameter, and no published large-sample estimate exists for the lower middle market. The familiar half-of-letters-fail figure is a practitioner estimate, not a measurement. The evidence assembled here is cross-market, so the segment-specific magnitudes are characterized rather than measured. A disclosed Cordis engagement panel, with stated size and methodology, would let the failure rate, the compression magnitude, and the aggressiveness-certainty relationship be estimated directly.