Most deals don’t fail at LOI.

They fail when reality changes after capital has already been soft-circled.

That moment is uncomfortable. It is also where most sponsors reveal whether they are operators or narrators.

In 2025, I was under contract on an eight-figure acquisition. Institutional capital, large family offices, and investment funds were engaged. On paper, the deal worked. The valuation was higher than I preferred, but I believed strong operational leadership could justify it.

Then the operating environment shifted faster than the model.

Revenue softened. Costs moved the wrong direction. Year 1 no longer looked like a bridge year. It looked like a test.

The question stopped being, “Does this deal work?”​
It became, “How do you underwrite a deal that is changing faster than your assumptions?”

That question is going to define 2026.

Why This Moment Is Becoming More Common

The 2026 outlook across institutional research is remarkably consistent on a few points:

• Operating costs, especially insurance, taxes, and labor, are compounding faster than revenue in most sectors.
• Capital markets are reopening unevenly. Debt is available, but terms are brittle.
• Volatility is no longer a tail risk. It is a base-case condition.

What this creates is a dangerous gap.

Deals start penciling again just as operating visibility deteriorates.

Sponsors feel pressure to move forward because momentum has returned. LPs slow down because they know models built on static assumptions break first.

This is why “conservative” deals are failing quietly.

The Three Bad Options When the Model Breaks

When performance deteriorates mid-raise, most sponsors default to one of three responses.

Option 1: Smooth the assumptions​
Treat the change as temporary. Keep the raise moving. Hope performance normalizes.

This destroys trust. LPs always find out.

Option 2: Defend the original valuation​
Explain harder. Add narrative. Emphasize long-term upside.

This shifts focus away from risk and toward persuasion. Institutional capital disengages.

Option 3: Kill the deal entirely​
Avoid reputational risk by walking away the moment uncertainty appears.

Sometimes this is correct. Often it is an overreaction.

None of these options address the real problem.

The problem is not forecasting.
It is structural fragility.

What I Did Instead

As performance weakened, I informed investors immediately. Some groups walked away. Others reissued commitments at meaningfully lower valuations.

That was not a failure. It was information.

Instead of forcing a binary outcome, we changed the structure.

We introduced a preferred equity layer that:

• Preserved value for the seller without pretending conditions had not changed
• Protected LP downside during an uncertain operating window
• Kept GP incentives aligned with durability, not speed

The deal did not “recover.”

It rebalanced.

An investor who initially passed returned once the capital stack matched the operating reality.

That outcome did not come from a better story.
It came from a structure that could absorb disappointment.

The Lens I Use When Reality Shifts

This is not a checklist. It is how I think when assumptions move mid-process.

1. Underwrite disappointment, not upside​
If revenue is flat.
If expenses run hot.
If nothing breaks, but nothing improves either.

Does the deal remain intact?

If the answer is unclear, the structure is not ready.

2. Separate price from risk​
When visibility drops, structure becomes the only honest lever. Preferred equity, reserves, and timelines matter more than entry multiple debates.

3. Let capital reprice truth​
High-quality capital does not disappear when conditions worsen. It reprices risk. Your job is to decide whether that repricing still makes sense.

4. Use structure to buy time, not leverage​
In volatile environments, the most valuable asset is optionality. Structures that force timing destroy it.

What This Means for 2026

Research points to a year where:

• Operating volatility persists
• Capital is available but selective
• Models break more often mid-process

LPs are not punishing volatility.
They are punishing fragility.

The sponsors who perform best in 2026 will not be the ones who time the bottom.

They will be the ones who can re-underwrite reality, communicate downside early, and restructure decisively without losing alignment.

That is no longer a “nice to have.”

It is the job.

Closing

If you are preparing to take a deal to market in an environment where assumptions can shift quickly, the work is not better forecasting.

It is building capital stacks and processes that can absorb change without breaking trust.

That is the work I do with a small number of operators each year.

See you next week,
​Damon

P.S. Wishing you a strong start to the new year. I appreciate you reading and thinking through these issues with me as the market evolves. If you're interested in how I can help you with structure or grow your portfolio Schedule a Call.