Five ways buyers chip away at your price

The number you agree at heads of terms is rarely the number that lands in your account.

Some places might spin  this as a “typical” run-of-the-mill bad luck: a working capital adjustment here, an awkward diligence finding there, even a late request about warranties. On their own, we agree they appear like harmless, isolated pieces of admin.  

Thing is, they aren’t isolated; this is exactly what drives price erosion. It has a shape and once you’ve watched it grow a few times, it becomes reasonably predictable. Spotting it can help you stop it.

Speaking from someone who knows, price erosion runs like this: the price chip is set up early, while everyone is still being agreeable and nothing feels adversarial. It gets collected late, once your alternative competitors are gone. It’s delivered by somebody you’ve never met. And it lands on whatever is most expensive for you to disprove.

I’ve pulled apart and laid out five versions of this pattern. Recognise the pattern and you’ll be able to spot the chip in its various shapes and formats. Spot the pattern, stop the pattern.

1. It was agreed months before it was collected

The working capital mechanism is the clearest example but can be one the trickiest to spot because a lot won’t argue about it at the time it’s brought up.

Scenario: You’re acquired on a cash-free, debt-free basis with a normal level of working capital left in the business (the word doing the heavy lifting here is “normal”). If the target is set above the level you actually run at, the difference comes off the price at completion, pound for pound. Set against the wrong twelve months, in a business that bills around MoD milestones rather than evenly, that can be a six-figure transfer your buyer would never, ever describe as a price reduction. Why would they?

By the time the price chip collected, there’s no time left to negotiate. The definition was agreed in the heads of terms, drafted by the side who went first, in a document everyone treated as a summary of intent. The collection months later is just the invoice, really.

The same is true of earn-out drafting. Who prepares the accounts it’s measured against, whether the buyer can push central costs into your division, what happens if they reorganise the sales team. Those answers are set in two paragraphs that read as procedural and they decide whether the deferred half of your price exists.

So the practical lesson is: read the heads as though they were the final contract, because on these points they effectively are.

2. The first adjustment is a test

Buyers seldom arrive with a single number in mind. A savvy business person always knows to have a range in mind when looking to negotiate. When they’re working on finding your range, however, is where the first chip comes in.

The opening price chip is usually small and something meant to illicit one of two feelings within you – either you feel awkward for refusing because it’s so small, or you come off as petty for refusing it. We’ve talked with quite a few SME owners who accept the first knock-down and then want credit for being easy to work with.

The buyer, however, is calibrating your willingness into a range. They learned something about how you respond under slight pressure and the second request is shaped by your answer to the first. Concede quickly and the sequence continues, because it’s working. Push back with a reason the other side can take to their own committee, and they have to rewrite their strategy before pushing for more again.

The counterintuitive bit is that an early, firm, well-argued refusal tends to make a deal smoother rather than rockier. You’re not being difficult or hard to work with. You’re giving the deal team something to report back, and you’re establishing that each subsequent request will cost them time.

If you take nothing else from this piece, take this: don’t only read the size of the first adjustment, but your behavioural response to it.

3. The “bad news” normally comes from someone you’ve never met

You’ll have spent months building a rapport with one person. Usually a corporate development director, often genuinely likeable, who understands the business and says the right things about your team.

That person will not be the one who reopens the price.

The reduction arrives from the deal team, or the investment committee, or occasionally from a lender nobody has mentioned before. Sometimes it’s framed as entirely out of your contact’s hands (which may well be true). The structure works because the relationship stays clean, and the bad news comes from somewhere you may have little to no standing for arguing. And, of course, the one person you have rapport with keeps their hands clean.

Recognising this as structure rather than misfortune should change your response. Your contact is still your contact. The request is a position taken by an organisation, and it deserves an answer addressed to the organisation rather than a conversation about whether you’re being reasonable.

4. It lands where disproving it takes too long

Chips don’t land on what’s wrong with your business, they land on what would take you six weeks to prove is fine.

Think about customer concentration because its the obvious one. The buyer has known about it since the information memorandum and raised it at week nine, because demonstrating that your largest customer is secure means contract reviews, conversations you can’t have and a renewal date you don’t control. They don’t need to be right, they only need you to lack the time.

In this sector the same logic attaches to a familiar set:

• Clearances held by individuals rather than by the business, where the question of what happens if that person leaves has no quick answer
• Framework agreements needing consent on a change of control, where asking the customer is itself a risk
• Revenue recognition on long-term contracts that your auditor accepted and their accountant now wants rebuilt
• Management accounts that don’t reconcile to the accounting system, so every figure needs explaining twice before it can be defended once

None of these requires anything to actually be wrong. The cost is in the verification, which is why the preparation matters so much more than the argument. A business that can answer in two days doesn’t get chipped on the point.

5. The timing belongs to their calendar

If a price reduction comes at the 11th hour, don’t take it personally because it normally isn’t.

Buyers run on their own timescales: Investment committee dates, financial year ends, fund deployment deadlines, a lender’s credit paper that has to go in by a certain Thursday. A chip landing in late November often has rather more to do with their quarter than with your warranty position.

This matters because it tells you something about leverage. If their calendar is tight, they need completion as much as you do, and a firm response is safer than it feels. If their calendar is loose and yours is tight (which is the usual arrangement during exclusivity), time is working steadily against you and every week of delay is a concession you’re making without deciding to.

It also suggests a question about what does your approval process look like, and what are the dates? Asked in week two, it sounds like diligence on your part. Asked in week fourteen, it sounds like desperation.

And it explains why exclusivity does so much damage. It doesn’t just remove your alternative, it hands the other side control of the clock.

What holds a price firm and intact

None of this requires a buyer to behave badly, and most of the people doing it would be puzzled to hear it described as a tactic. It’s simply what happens when one side has done this forty times and the other is doing it once.

Read the heads of terms as though they were the contract, because for working capital and earn-out mechanics they are. The erosion is drafted there and collected later.

Answer the first adjustment properly. It’s a question about you rather than about the warranty, and the answer sets the tone for everything after it.

Do the dull preparation before anyone asks. Monthly accounts that reconcile, revenue recognition you can defend, ownership tidied, clearances and licences mapped. It removes the findings that become currency, and it’s worth more than any amount of resolve in the room.

Keep an alternative alive for as long as you possibly can. Competitive tension is the only thing that disciplines a price, and everything in this piece becomes considerably harder once it’s gone.

If you’ve been approached and are working out what to do next, we’re happy to talk it through with nothing attached to it. Even a no-obligation conversation, where you can ask your real scenario questions, can do more to prepare you for a buyer than the guy next door.