It wasn't long ago when there were few, if any, deal breakers. In fact, before the onset of the worldwide economic downturn, a higher competitive bid was likely the only factor that might derail a deal. Conditions have changed dramatically over the past 18 months. Today a host of deal breakers can threaten a closing. None are new, but they've reared their heads because of the turbulent, albeit improving, conditions of lower-middle-market and middle-market M&A. Here's a review of today's five most notable deal breakers.

Material liabilities. The revelation of one or more material liabilities can often scuttle a deal that has been painstakingly put together. Unfortunately, material liabilities became more prevalent in midsize companies as the economy sputtered.

For example, during a downturn in sales, companies understandably want to book revenue as quickly as possible to prop up their diminishing results. Discovering a deferred revenue liability, such as the delivery of goods or services in the future for revenue previously booked, can be disruptive to the deal process.

Of course, there is a multitude of recorded and unrecorded liabilities that can effectively wreak havoc on deals, including underfunded pension plans or self-insurance reserves, neglected capital expenditures, product warranty reserves, pending litigation, tax liabilities and lease commitments.

Post-diligence declining sales. Prior to the downturn, a deal's initial price would be based on sales and cash flow in a healthy economy projected into the future. Unfortunately, 2008 was not an accurate prelude to 2009, and many projections fell woefully short. During the due diligence period in a downward-spiraling economy, buyers often observe deteriorating sales. As the closing date approaches, renegotiating the price downward can prove deadly, especially for lower-middle-market deals involving one or more entrepreneurs who poured their blood, sweat and tears into a company.

Failed financing. It's no secret that the credit markets have been downright dismal since late 2008. Previously, deals might have been leveraged up to 90% of the sales price, but beginning in late 2008, senior lenders typically demanded a 50% equity contribution and would lend no more than two turns of Ebitda. So, many overly enthusiastic buyers saw their deals fail when lender requirements changed. In addition, lenders might have gotten cold feet during the due diligence period. With an economy headed south and credit markets drying up, financing sources became harder to come by and more apt to pull out of a deal.

Seller frustration. The selling process has never been easy for the middle market, where many companies have succeeded because of one owner or a small group of entrepreneurs. The selling process represents one more task the owners must spearhead while operating the business. Data accumulation and due diligence are burdensome, but a healthy payoff makes them tolerable. A plummeting economy makes matters worse. Clearly, the rapid change in the economic environment and falling sales multiples took some time for sellers to digest. Many middle-market sellers reacted by waiting out the downturn. A few, who were compelled to sell, grudgingly adjusted their price expectations.

Lost confidence in management. When confidence in management wanes, there is little chance to complete a deal. And this is especially true during tumultuous economic times, when heightened risk puts every strategy, lost customer or expense under a microscope.

First impressions of management can be critical. Confidence either builds from there or erodes. Without it, buyers distrust the information provided by management. If due diligence is marred by distrust, any miscue could lead to deeper scrutiny that might unravel the deal.

Certainly the deal environment of the past year or so was far from normal, but the circumstances leading up to the calamitous economy of 2009 were not typical either. Most likely, a new normal will be established throughout the rest of 2010 and into 2011. Deals will not return to 2007-2008 volumes just yet; however, some of the prominent deal breakers of 2009 are already fading into the background, as both buyers' and sellers' expectations have been recalibrated. With dealmakers motivated to put money to work, the new normal can't be far behind.

Chaitan Fahnestock is the managing director at Riveron Consulting LP. This article originally appeared in The Deal and reprinted with permission.