Capittal's view: the buyer cuts the price after due diligence, what can you do?

Quick answer

Capittal's view is that a price cut after due diligence is only worth negotiating if the buyer names a specific finding, converts it into euros and explains why it hits future earnings and not only past ones. If the cut arrives generic, unquantified and in the final week, it is a negotiating tactic and not a valuation adjustment. Your defence starts by demanding those three things in writing, and by reviewing the price mechanism before the headline multiple.

How do I tell a legitimate adjustment from an attempt to shave my price?

A legitimate adjustment comes from a verifiable fact that due diligence has uncovered and that changes one of the three figures behind the price: recurring EBITDA, net debt or normalised working capital. A contract with a material customer that expires in four months and is not being renewed is a finding. An employment provision nobody had booked is a finding. "We have seen risks" is not.

Opportunism has a recognisable signature:

• It is generic. It talks about risk perception, the mood of the investment committee or the market, not about a line in the profit and loss account.
• It is unquantified. It proposes a percentage cut on the whole price instead of an amount built up from the finding.
• It arrives late. It appears once due diligence has closed and the SPA is drafted, not when the team spotted the issue.
• It comes with urgency. It is presented with a short deadline and signing as the reward.
• It moves nothing else. A real finding would also move the warranties, the escrow or the perimeter. If it only moves the price, it was not a finding.

The decisive test is simple. Ask the buyer to point to the finding inside their adviser's due diligence report. A real adjustment is written there. A tactic only exists in the email.

Which three questions dismantle a price cut?

The three questions come in order and none of them is skipped. Each one forces the buyer a level deeper into detail, and most tactical cuts collapse at the second.

• Which specific finding? Name, document, financial year and owner inside the due diligence report. Without a documentary reference there is no conversation.
• How does it convert into euros? The full calculation: annual amount affected, number of years, rate applied and which figure it hits. If the finding touches EBITDA, the effect is multiplied by the multiple. If it touches debt, it is subtracted euro for euro and must not be multiplied.
• Why does it affect the future and not only the past? A closed historic contingency is covered with a warranty or a holdback, not with a price cut. Only something that reduces recurring profit in the coming years justifies touching value.

That last distinction saves the most money. Many due diligence findings are historic risks: an open tax inspection, a disagreement over VAT treatment in one financial year, a specific employment claim. All of that is handled with a specific indemnity in the SPA. Accepting a price cut for a past risk means paying twice, because you will sign the indemnity as well.

Why do I lose more money in the mechanism than in the multiple?

Because the multiple is the headline and the mechanism is the small print that defines what you collect. An experienced buyer does not argue about the multiple. He argues about the definitions around it, and every definition is worth money.

• Net debt. The argument is not the bank balance but what else counts as debt: leases, recourse factoring, dividends declared and unpaid, accrued holiday pay, management bonuses, shareholder loans or the transaction costs themselves.
• Target working capital. The normal level is set as an average of previous months. Choosing the months with the highest working capital, or including one-off items, moves the completion adjustment by hundreds of thousands of euros without touching the announced price.
• EBITDA adjustments. Every normalisation the buyer rejects — the owner's salary, non-recurring costs, the market rent of the premises — lowers the base and is then multiplied by the multiple.
• Escrow and deferred payment. These do not cut the price. They delay it and make it conditional. Fifteen per cent held for twenty-four months is not the same money as fifteen per cent paid at completion.

A buyer who cuts the multiple makes noise. A buyer who redefines net debt makes cash. Review the mechanism as hard as you defend the headline.

Why does the cut always arrive at the end of the process?

Because bargaining power shifts with the calendar. When you sign the LOI you still have live alternatives and the buyer still has uncertainty. Four months later you have granted exclusivity, shown your margins by customer, paid your advisers, your management team knows there is a process, and the runners-up have committed their capital elsewhere.

The buyer knows that calendar as well as you do. A last-minute cut leans on the cost of restarting, not on the finding. That is why unlimited exclusivity is the most expensive gift you can give: every extra week transfers value to the other side for nothing in return.

There is a reliable signal. If the due diligence team spotted the issue in week three and the cut appears in week twelve, the buyer waited until your options ran out. Ask for the date of the report.

What could I have done to prevent this?

Almost all the work against price chipping happens before the LOI is signed, not after due diligence. These are the four measures that have most often prevented a cut in our mandates.

• Vendor due diligence. Finding the problem while it is still yours turns it into a task on your list. Finding it in the buyer's due diligence turns it into a price cut.
• Your own quality of earnings. An independent report that normalises your EBITDA with documentary support for each adjustment makes it very hard for the buyer to dismantle the calculation base at the last minute.
• Define net debt and working capital in the LOI itself. Cash-free, debt-free is not enough as a phrase. The LOI must carry the closed list of items that count as debt and the formula for target working capital, naming the months to be averaged.
• Capped exclusivity. A counted number of weeks, defined due diligence milestones and automatic lapse if the buyer misses the calendar. No automatic extension.

We add a fifth, procedural measure: keep a second candidate alive as far as exclusivity allows. A price cut is negotiated very differently when a real alternative exists.

What options do I have once the cut is on the table?

You have four possible answers and only one of them is bad: accepting the cut without asking for anything in return.

• Reject it with documents. If the finding is historic or unquantified, reply with your own calculation and offer a specific indemnity in the SPA instead of a price cut.
• Accept it with a trade. If you give up price, get paid in another currency: less escrow, a shorter warranty period, a lower liability cap, fewer representations and warranties, or more cash at completion.
• Turn the cut into an earn-out. If the buyer doubts that future profit will hold, let him pay if it holds. The earn-out must be measured on a figure you can still control, under accounting rules written into the contract.
• Walk away. End the exclusivity, close the process formally and return to the market with your information already cleaned up.

The trade is the answer that works most often, because a buyer chipping tactically wants price and is usually willing to pay for it with contract terms. A buyer with a genuine finding accepts the earn-out without hesitation, because he believes his own analysis.

When is walking away the right decision?

Walking away is right when the cut is not supported by a documented finding and the buyer refuses to quantify it. It is also right when the cut arrives together with a bigger holdback, wider warranties and a longer claims period: that tells you the deal has changed in nature, not only in price.

Before you do it, work out the number that matters: how much cash you receive at completion under the reduced offer, against what you would receive by restarting the process in six months, net of adviser costs and the risk of a weaker year. If the gap is small, walking away is cheap, and it also protects the rest of the negotiation.

And there is one case that is not negotiable: when the buyer changes the price twice. The second cut announces a third.

What is the next step if the buyer has already cut your price?

Ask in writing for the finding, its quantification and its effect on future results, and do not respond with a number until you have all three. With those inputs in front of you, rebuild the price in your own model, separate what is a genuine reduction in value from what should be an indemnity in the SPA, and prepare the trade you will ask for if you end up conceding. That conversation is won with the calculation in hand, not with the wish to close.

At Capittal Transacciones we work on post due diligence price cuts within the confidential valuation we prepare for owners considering a sale. We are a mid-market M&A boutique operating in the approximate range of 3 to 250 million euros, with eight offices in Spain (Barcelona as headquarters, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia) and we are part of the NRRO group. The partner handles each mandate directly, including the negotiation of the price adjustment with the buyer.

Keep reading

• Guide: every decision you face when selling your company
• How to compare two offers for your company
• The buyer walked away after the LOI

Defend your price in the final stretch: talk to Capittal