When a Buyer Lowers the Price After Due Diligence
Why buyers cut the price after the letter of intent is signed, which cuts are fair, and how a seller can respond without losing the deal.
Words by
Matan Michael
The call usually comes three or four weeks after the letter of intent is signed. The buyer is friendly, says they still like the business, and then says that the accountant found a few things and the number needs to come down. Most owners have never been on the receiving end of this call, and the first reaction is anger, which is understandable and not much use. A lower price after due diligence is common enough that you should plan for it before you ever sign anything.
Why the number moves once the buyer is inside
A letter of intent is a price based on what the buyer has been told. It has not been checked. During due diligence the buyer's accountant rebuilds your earnings from bank statements, tax returns and sales records, and the buyer's lawyer reads your contracts and your lease. Whatever differs from the story in the offering materials turns into a reason to talk about price again.
Some of this is simply arithmetic. Your add-backs were counted at one figure and the accountant accepts a smaller one. A vehicle was treated as personal and the buyer sees it used for deliveries. A month that looked strong turns out to have included a deposit that belongs to next quarter. When earnings drop by a certain amount and the buyer is paying a fixed multiple of earnings, the price drops by a bigger amount. Owners are often surprised by how fast a modest correction turns into a large change in the number.
Some of it comes from position, because the buyer now has time on their side. You have taken the business off the market, told your landlord and maybe a key employee, and spent weeks answering questions. The buyer knows walking away costs you more than it costs them. A small share of buyers use that position on purpose, and a larger share drift into it without meaning to. In either case the call sounds the same, so you need a way to tell them apart.
A fair adjustment and a squeeze look different
Ask one question about every item the buyer raises. Is this something that was not disclosed or was misstated, or is it something the buyer has decided they dislike now? A fair adjustment points to a specific document. The lease has a rent step that was not in your summary. A customer who made up a large part of sales gave notice. The inventory count came up short of what you stated. You can read the paper, agree it says what the buyer says, and talk about what the price should be.
A squeeze points to a feeling. The buyer says the business seems riskier than they thought, or that the market has softened, or that they found a similar business for less. Nothing in the data room changed. If the buyer cannot show you a page that changed their view, the reduction is a negotiating move. It is still worth answering calmly, because many buyers who open this way will settle for a fraction of what they asked once they see that you are not going to fold.
Then there is the middle case, which is the hardest. The accountant disagrees with how you treated an expense. Reasonable accountants differ about add-backs, and neither side is lying. Our post on what counts as an add-back is a decent place to see where those lines usually sit. In the middle case you are arguing about judgment, and the person with better documentation tends to win.
What to do on the day of the call
Do not agree to anything on the phone. Say that you want to see the findings in writing and that you will respond within a few days. This is ordinary and no buyer will think less of you for it. What you want to avoid is a number agreed in the heat of a conversation that you then try to walk back.
When the written findings arrive, read them with your own accountant sitting next to you. Go line by line and sort every item into one of three groups. Items where the buyer is right, items where the buyer is wrong and you can prove it, and items that are arguable. Most owners find that the first group is smaller than the buyer's total suggests and the third is larger than they expected. Having the sorted list in front of you changes the tone of the reply, because you can say that three of the seven points are accepted, two are answered by the attached records, and two are open for discussion. A seller who responds like that looks organized, and an organized seller is harder to push.
If an advisor is running your sale, send the reply through them. Part of the reason is that tone is easier to control, and part is that you and the buyer will still have to work together for weeks. Anything sharp that you say in an email is something you will read again later with regret.
Ways to answer other than a lower price
Price is the first lever and often the worst one. A buyer who found a risk has a worry, and the worry can often be handled without cutting the headline number.
If the concern is a customer who might leave, a portion of the price can be held back and paid if the customer is still there at a set date. If the concern is that earnings will not hold, part of the price can be tied to results after closing. Our post on earnouts, holdbacks and working capital explains how those work and where they hurt the seller. They shift risk to you, so use them when you believe in the business and the buyer's worry looks overstated.
If the concern is a specific liability, such as an unresolved tax matter or a dispute with a former employee, the buyer may accept an indemnity or a dollar amount held in escrow for that item only. That is usually better for you than a permanent cut, since an unused escrow comes back. Seller financing is another option, where you carry part of the price on a note. It is more exposure than most owners want, but it tells the buyer you are confident, and some buyers soften quickly when they see you willing to stand behind the numbers. The seller financing guide covers the terms to watch.
The last option is trading a price cut for something else the buyer values, such as a longer period of your help after closing, a faster close, or fewer conditions. These are cheaper for you than they look at first, provided you are willing to deliver them.
How owners create the opening without meaning to
Almost every price cut we see has a cause that started months earlier. Books that were prepared by someone whose job was filing taxes mix personal and business spending. Add-backs were never backed with receipts. A customer concentration problem was left out of the summary because it seemed obvious. The owner stated inventory from memory. A handshake agreement with a supplier or a landlord was never put on paper.
None of those are dishonest. They are habits of running a business, and a buyer's accountant treats each of them as an invitation to reconsider. The best protection is to find them yourself before the buyer does. A review of your financials by an outside accountant before you go to market, sometimes called a sell-side quality of earnings, will find most of what a buyer would find, and you get to decide how to present it. The post on quality of earnings reports describes what one covers, and the one on getting your financials ready is a good checklist in prose form.
Disclosure matters just as much as the books. If there is a weak point, say so early and say how you are handling it. A buyer who hears about a departing customer from you in the first conversation treats it as a known item with a price on it. A buyer who finds it in week three treats it as evidence that other things were hidden, and then the cut gets bigger than the problem deserves.
When to hold firm and when to leave
Some price cuts should simply be accepted. If a number in your materials was wrong, the buyer is entitled to a correction, and fighting it damages your credibility on every point after that. Make the correction cleanly, ask for the rest of the price to be confirmed, and move on.
Other cuts deserve a refusal. If the buyer returns a second time after you agreed to a reduction, the pattern is more worrying than any single request. Reductions that come in pieces, a little this week and a little next week, are sometimes a method. Say plainly that you accepted the findings as they stood on a given date, and that you will hold the agreed number unless something new turns up. Then ask whether the buyer is still able to close at that figure. A buyer who is serious will answer yes. A buyer who is stalling will start to explain.
You also need to know what you will do if the deal falls through. This is where having a second interested buyer, or at least a fair record of earlier inquiries, matters. If no one else has seen the business, the buyer holds the stronger hand and you may decide the reduced number still beats starting again. That is a legitimate decision, and the only bad version of it is making it without knowing the alternatives. Rules about exclusivity periods and what you may disclose to others during one depend on your letter of intent and your state, and your attorney confirms what applies.
If it helps to hear it from the other direction, buyers who retrade without cause often lose the next deal as well, because advisors, lenders and sellers talk. That is poor comfort when you are in the middle of it, but it may explain why a firm and polite reply sometimes ends the pressure within a day.
What to start on this week
Gather the support for your add-backs and sort it so each one has a document behind it. Read your lease and your three largest customer agreements as if you were the buyer and write down what surprises you. Count your inventory and compare it to the figure in the books. Then decide now, before any offer arrives, which items you would trade for price and which you would not, so the call does not catch you with nothing prepared.
