Published by Evolution Capital | IT/Telco M&A Specialists | 25 Years | 250+ Transactions
Evolution Capital · 25 Years · 250+ Deals
Chip Off the Old Block
The call that every seller dreads comes in week four or five of due diligence, just when completion feels certain. The buyer wants to “revisit pricing based on what we’ve discovered.” This is price chipping. If you’re not prepared for it, it can cost £500,000 to £2 million on a mid-market IT services transaction.
Published by Evolution Capital | IT/Telco M&A Specialists | 25 Years | 250+ Transactions
25+
Years in technology M&A
250+
Transactions
$1bn+
In completed transactions
“The best protection against price chipping is preparation before the buyer ever gets the opportunity to chip.”
Evolution Capital · From the trenches
- At a Glance
What You'll Learn.
Understand Price Chipping
Learn why buyers reduce their offers and how to distinguish legitimate adjustments from opportunistic renegotiation.
Protect Your Valuation
Discover how preparation, clean financials and strong evidence can help defend the agreed deal value.
Respond With Confidence
Learn how to challenge unsupported price reductions and protect your negotiating position when a chip occurs.
01
What Is Price Chipping?
02
When a Price Adjustment Is Legitimate
03
When Price Chipping Is Opportunistic
04
The Emotional Reality of Being Chipped
05
How to Protect Against Price Chipping
06
When a Chip Happens: How to Respond
07
How Evolution Capital Can Help
09
Common Questions
I was at a family wedding recently where I was introduced to the concept of the “fuck it fortnight.” In the two weeks before a wedding, an entirely predictable parade of unforeseen expenses lands: the flowers need upgrading, the car has changed, the photographer wants extra hours, the venue has a new corkage charge. Each one individually is infuriating. But the couple, having spent months planning their fairytale day, having told everyone they know, having committed emotionally and financially to a specific vision of how this moment is going to feel, just say “fuck it” and agree to everything. The alternative, digging in on the flowers at this stage, is unthinkable.
In M&A, the same dynamic plays out in the weeks before completion. You have built something over many years. You have agreed a price for it. You have told your senior team, instructed lawyers, spent £140,000 on advisers, mentally allocated the proceeds, and started planning the next chapter. And then, in week four or five of diligence, just as completion feels within reach, the buyer calls.
“We need to discuss some findings from our diligence work. There are a few items we need to address before we can proceed to completion.”
By the end of the call, they are at £13.2 million. A £1.8 million reduction on the agreed £15 million. Twelve percent off the price. And you are in exactly the same position as the couple staring at the florist’s revised invoice: too committed to walk away, too far into the process to pretend it hasn’t happened, too emotionally invested in the outcome to approach this rationally.
You created the old block. You built the business, you know it inside out, and you have spent years making it what it is. The last thing you want is to see it chipped.
But is it always necessary to accept a chip? No. Can it be prevented in many cases? Yes. And almost entirely, the answer comes down to preparation. The businesses that get chipped are almost always the ones that went to market without doing the work to make their numbers bulletproof. The businesses that don’t get chipped, or contain it when it happens, are the ones that made that work a priority well before the process started.
How to Protect Your IT Services Deal from Late-Stage Price Erosion
Evolution Capital
What Price Chipping Actually Is
Price chipping, sometimes called deal re-trading or price erosion, is the reduction in purchase price that occurs after a letter of intent has been signed but before completion.
The mechanics are consistent. You negotiate and agree a price. You sign an LOI granting the buyer exclusivity to complete due diligence. The buyer’s FDD team begins reviewing your financials, customer contracts, staff arrangements, and operational metrics. In week three or four, issues are surfaced. Some are genuine discoveries. Others are aggressive interpretations or buyer’s remorse dressed up as diligence findings. By week five, you are being told the business is worth materially less than agreed.
What makes this so effective from a buyer’s perspective is timing. By the point chipping occurs, the seller has already committed: financially, emotionally, and practically. The business has been partially disrupted by the diligence process. Senior staff know a sale is underway. Walking away means starting over, re-engaging the market, and explaining to new buyers why the previous deal collapsed.
The buyer knows all of this. Which is exactly why they have leverage.
- What Matters Most
What to Do When a Buyer Chips the Price
01
Don't React Immediately
Take time to understand the buyer’s claims before agreeing to any adjustment.
02
Demand the Evidence
Ask for written justification, supporting documentation and specific calculations for every proposed reduction.
03
Build Your Counter-Position
Work with your advisers to test each claim and provide evidence where the buyer’s assumptions are unsupported.
04
Negotiate the Outcome
Challenge both the size and structure of any legitimate adjustment rather than accepting the buyer’s proposed figure.
Evolution Capital
When a Price Adjustment Is Legitimate
Not every post-LOI price adjustment is opportunistic. Sometimes buyers discover material information during diligence that genuinely changes the risk profile of the transaction.
EBITDA quality issues
If the seller represented £1.8 million EBITDA but diligence reveals that £300,000 of that comes from non-recurring project work, related party transactions at inflated rates, or aggressive accounting treatment, the sustainable EBITDA is lower and a valuation adjustment is warranted. We worked on a transaction where the founder’s spouse was paid £85,000 annually as a consultant with no defined role, and a connected company was paid £40,000 for marketing services with no documentable deliverables. These weren’t disclosed as related party transactions. When identified, the normalisation was justified.
Customer or revenue events during diligence
If a key customer gives notice during the diligence period, or contracts reveal termination rights that weren’t disclosed, the revenue base has materially changed. A price response to this is reasonable.
In these scenarios, a price adjustment is not chipping. It is a response to new information that changes the commercial basis for the transaction. The seller’s best defence here is to have surfaced and disclosed these issues themselves, before a buyer’s team found them.
Undisclosed liabilities or material risks
Material customer concentration not disclosed in the information memorandum, pending litigation, regulatory compliance gaps, or IP ownership issues that weren’t surfaced in initial conversations are all legitimate grounds for valuation reconsideration.
Working capital gaps
If the LOI assumed a normalised working capital position and diligence reveals the business requires materially more working capital to operate sustainably, this affects the cash the buyer needs to fund at close.
Evolution Capital
When Price Chipping Is Opportunistic
Far more common in our experience are price chips that exploit the seller’s commitment rather than respond to genuine new risk.
Buyer’s remorse on pricing. The buyer agreed to 8x EBITDA when competing against other bidders. Now in exclusivity, they’ve concluded they overpaid and want to renegotiate using “diligence findings” that are really just normal characteristics of any owner-managed business.
Hyper-aggressive normalisations. Every business has some adjustments between reported and normalised EBITDA. Opportunistic buyers use aggressive interpretations to manufacture large adjustments, claiming costs will increase or revenues will decline without strong supporting evidence. We reviewed a transaction where the buyer argued the seller’s sales function was “underinvested” and would require an additional £200,000 annually. Their evidence was a comparison to their own sales cost structure, operating in different geographies with a completely different business model. The adjustment had no basis in the target’s actual performance or requirements.
Manufactured urgency. Some buyers deliberately slow-walk diligence, running out the exclusivity clock so the seller faces a binary choice: accept the reduced price or start over with the market now aware that a previous deal failed.
Testing seller resolve. Sometimes a chip is simply a test. If the seller accepts it quickly, the buyer learns they are dealing with someone desperate or unsophisticated. In our experience, sellers who fold without resistance occasionally face a second chip.
Evolution Capital
The Emotional Reality of Being Chipped
By the time a price chip lands, most sellers have already made the psychological transition to post-exit life. They’ve told their spouse. They’ve planned what they’ll do next. They’ve told senior team members. They’ve stopped investing in long-term initiatives that won’t pay back within the deal timeline.
One seller described it to us this way: “I felt like I’d already moved out of my house emotionally. The buyer was asking me to accept less rent, but I couldn’t face moving back in. So I took the lower price just to get it done.”
This is exactly what opportunistic buyers count on.
The practical reality compounds the emotional one. By week five of diligence, sellers have typically incurred £100,000 to £200,000 in legal, accounting, tax, and corporate finance fees. These are sunk costs. Walking away means those fees are lost, plus months of management time, plus the momentum the business has lost while the founder’s attention has been elsewhere.
The buyer understands all of this. They have modelled your commitment curve. And they have timed the chip for maximum leverage.
How to Protect Against Price Chipping
The most effective protection is preparation, specifically surfacing and addressing issues before buyers discover them in diligence.
Get your financial information clean, reconcilable, and anchorable
The single most effective protection against price chipping is financial data that cannot be argued with.
By “anchorable” we mean numbers that can be traced back to a primary source and verified independently. Revenue figures that reconcile to customer contracts. EBITDA that ties back to the P&L and from there to bank statements. Working capital that is supported by a fully reconciled aged debtor schedule, a properly calculated deferred revenue balance, and creditors that reflect genuine commercial terms rather than pre-close manipulation. Add-backs that are supported by documentary evidence, not just a line in a spreadsheet.
When a buyer’s FDD team sits down with financial data like this, they have very little room to manufacture a chip. The numbers are anchored. Any proposed adjustment has to be argued against documented evidence rather than against vague management assertions. The difference in negotiating position is significant.
The businesses that get chipped hard are almost always those where the numbers are not reconcilable: where management accounts don’t tie to filed accounts, where EBITDA add-backs are unsupported, where the working capital position at completion differs materially from anything that was discussed during diligence. Each gap is an opening for an aggressive buyer.
“Don’t accept a price reduction simply because the buyer has asked for one. Make them show their working.”
Evolution Capital · From the trenches
Evolution Capital
Disclose proactively in your information memorandum
If your business has weaknesses, and every business does, disclose them proactively rather than hoping buyers don’t find them. Customer concentration? Acknowledge it and explain your mitigation plan. Founder dependency on key relationships? Describe the transition process. EBITDA normalisations for owner benefits? List them with supporting documentation.
This approach has two benefits. Buyers cannot later claim they discovered material issues you tried to conceal. And you control the narrative: you explain context, plans, and why issues are manageable, rather than letting buyers interpret raw facts negatively in a hostile environment.
Commission vendor due diligence before going to market
Engaging a credible FDD firm to review your financials and produce a normalised EBITDA analysis before you go to market is one of the highest-value steps you can take. Vendor DD surfaces issues while you have time to address them or develop clear explanations. It sets the baseline for normalised EBITDA that buyers will reference. It demonstrates professionalism and transparency that builds buyer confidence. It reduces the diligence timeline because much of the work is already done. And it limits scope for chipping because buyers cannot credibly claim to have discovered issues you’ve already disclosed and quantified.
Vendor DD costs £20,000 to £50,000 for a typical mid-market transaction. It can prevent £500,000 to £2,000,000 in price erosion. The economics are straightforward.
Fix material weaknesses before launching the sale
If vendor DD identifies material issues, the right response is almost always to address them before going to market rather than trying to manage them through the diligence process. Revenue concentration risk? Spend six months diversifying. Compensation below market creating retention risk? Bring salaries up before buyers find them. Deferred capex creating a maintenance backlog? Make the investments. Customer contracts on weak terms? Renegotiate them.
This requires delaying the sale timeline, which is psychologically difficult when you have a number in mind and a timeline you’re attached to. But selling a stronger business at a premium is better than selling a weaker business at a discount, and the value difference is usually not close.
Structure the LOI to limit chipping risk
The terms of your letter of intent matter enormously and are more negotiable than sellers typically realise.
Locked box versus completion accounts. In a locked box structure, enterprise value is fixed based on a balance sheet at a specific recent date, and any cash generated after that date belongs to the seller or buyer respectively. This eliminates working capital disputes and limits scope for price adjustments. Completion accounts structures allow for post-close adjustments based on actual working capital and debt at completion, which creates more room for buyer negotiation and dispute.
Break fee provisions. A break fee that the buyer must pay if they walk away without cause makes opportunistic chipping more expensive and signals your seriousness about holding them to agreed terms.
Exclusivity period. Shorter is better from a seller’s perspective. 60 days of exclusivity puts more pressure on buyers to complete diligence efficiently rather than slow-walking the process to create leverage.
Pre-agreed adjustment mechanisms. If there are known areas of potential adjustment, define how they’ll be handled in the LOI rather than leaving them open for later negotiation under time pressure.
Retain advisers who have been here before
Generalist accountants and lawyers aren’t sufficient. You need advisers who have navigated dozens of IT services transactions and know how to structure deals, respond to chipping attempts, and negotiate effectively.
Experienced advisers know what is normal versus aggressive. They know when to push back hard and when to compromise. They are not emotionally invested in closing at any cost: at the moment you are desperate to complete, your adviser can objectively assess whether the buyer’s demands are reasonable and counsel you to walk away if needed.
When a Chip Happens: How to Respond
Despite best efforts, price chips still happen. The response matters as much as the preparation.
Don’t react immediately. The buyer’s opening position is often aggressive, designed to anchor the negotiation at a lower price and test your resolve. Don’t agree to anything on the initial call. Take time to review every specific claim with your advisers.
Demand detailed justification with supporting evidence. Require the buyer to provide written documentation of every claimed issue with specific financial impact calculations. Vague assertions don’t justify price reductions. “We think your EBITDA is overstated” is not sufficient. You need: “We believe £180,000 of revenue is non-recurring based on the following contracts, and therefore sustainable EBITDA is £180,000 lower, which at 8x justifies a £1.44 million reduction.” Force them to show their working. Vague claims collapse under scrutiny.
Have your advisers assess legitimacy independently. For every issue, build a counter-position. If they claim costs will increase, provide benchmarking data showing current costs are market-appropriate. If they claim revenue is at risk, provide customer reference letters or contract provisions demonstrating stability.
Negotiate hard on quantum and structure. Even where some adjustment is warranted, the amount and structure are negotiable. If the buyer claims £300,000 of revenue is at risk, that does not automatically justify reducing price by £2.4 million at 8x. Perhaps the probability of loss is 30%, suggesting a £720,000 adjustment. Or perhaps the risk can be addressed through earnout structure rather than upfront price reduction.
Be genuinely willing to walk away. This is the hardest and most important piece of advice. If the chip is opportunistic and aggressive, walking away may be better than accepting a bad deal. Yes, you have invested time and money. Yes, it is painful. But sometimes calling the buyer’s bluff changes the dynamic entirely.
We saw this in a Telco services transaction at £11 million agreed price. The buyer proposed a £1.8 million chip citing revenue quality concerns. The seller’s advisers demanded detailed justification for every claim, produced counter-evidence for most assertions, and after two weeks told the buyer that if they couldn’t proceed close to the original valuation, the seller would terminate and re-engage the market. The buyer returned three days later. The final adjustment was £350,000, addressing two legitimate working capital items. The seller’s willingness to walk preserved £1.45 million in value.
Compare that to a similar transaction in the same period where the seller, exhausted and eager to close, accepted a £1.2 million reduction after brief negotiation. They later learned the buyer had used identical tactics in three other acquisitions. It was their standard playbook.
Same buyer playbook. Dramatically different outcomes based on seller response.
Price chipping is predictable. The triggers are consistent. The tactics are consistent. And the sellers who avoid it, or who contain it when it happens, are almost always those who were better prepared and better advised. Because preparation comes before the sale process, EC Analytics comes first.
EC Analytics (Virtual CFO / CFO Assist)
The ammunition buyers use to justify price chips, EBITDA quality concerns, working capital weaknesses, unsupported add-backs, undisclosed liabilities, almost always comes from financial infrastructure that wasn’t built properly before the sale process started. EC Analytics works with IT services businesses in the twelve to twenty-four months before going to market to build financial data that is clean, consistent, reconcilable, and anchorable. Numbers that tie together across every source. Working capital tracked and evidenced monthly. Add-backs supported by documentation. A normalised EBITDA that the seller can stand behind and that leaves a buyer’s FDD team with very little room to manufacture a chip.
We run competitive sale processes for IT services and Telco businesses, which is itself the strongest structural protection against aggressive chipping. A buyer who competed for your business against three other credible parties does not chip the price in week four: they know you can walk back to the market with a compelling story. We structure LOI terms that limit buyer leverage post-exclusivity, and we negotiate hard when chips do occur, because we have seen every variant of this approach across 250 transactions and we know what is legitimate and what is not.
When we act as vendor DD adviser, we run the same quality of earnings review a buyer’s FDD team would conduct, before they do it. We surface the issues that would otherwise become chip justification, give you time to address or properly explain them, and set a normalised EBITDA baseline that is defensible and already documented. The sellers who come to market with clean vendor DD have a materially different negotiating position when a buyer’s team finds less than expected.
How Evolution Capital Can Help
A Note on Confidentiality
- Our Blog
Related Articles
What is the EV to equity value bridge in an IT services acquisition?
Enterprise Value is the agreed value of the business before accounting for its financial position. Equity value, what you actually receive at completion, is derived by adjusting EV through the net cash and debt schedule, which adds cash and deducts financial debt and debt-like items, and the working capital adjustment, which is positive if completion working capital is above the agreed peg and negative if below. Understanding this bridge before going to market is essential: the adjustments frequently move the headline number by £500,000 to £2 million or more.
What is an SPA and why does it matter for balance sheet purposes?
The Sale and Purchase Agreement is the binding legal contract governing the transaction. It defines the purchase price mechanics, including how the balance sheet feeds into the final price through either completion accounts or a locked box structure, what items are treated as cash, debt, or debt-like, and the working capital peg. The SPA is where the balance sheet stops being an accounting document and becomes a financial settlement mechanism. Understanding its terms before signing is essential.
What is the difference between completion accounts and locked box?
Completion accounts is the standard structure in the UK mid-market IT services space: the price is estimated at signing and adjusted post-completion based on the actual balance sheet, with a reconciliation process typically taking 30 to 90 days after the deal closes. Locked box fixes the price based on a historical balance sheet, with no post-completion adjustment. Locked box provides price certainty but requires a very clean historical balance sheet and is rarely seen at the lower to mid end of the UK market.
Why is deferred revenue so important in IT services M&A?
Deferred revenue represents cash received for services not yet delivered and is a liability on the balance sheet. For IT services businesses with annual or multi-year contracts billed upfront, and particularly those serving customers who time spend around financial year-ends or seasonal cycles, it can be a very material number. Businesses not on accrual accounting often carry no deferred revenue on their balance sheet at all, meaning it overstates the net asset position. Buyers always restate, and the adjustment comes off your proceeds.
What is a Section 455 charge and how does it arise from a director's loan account?
If a director owes the company money through a DLA and it is not repaid within nine months of the company’s accounting year-end, the company faces a Section 455 tax charge of 33.75% of the outstanding balance. This is repayable by HMRC once the loan is repaid, but it represents a real cash cost at the point of a deal, treated as a debt-like item deducted from proceeds. A £150,000 outstanding DLA creates a £50,625 s.455 charge on top of the loan balance itself.
Do I need a consolidated balance sheet if I operate through multiple legal entities?
Yes. Buyers always look at the consolidated position across all entities in the group. Holding company balance sheets that haven’t been updated for months or years are one of the most common sources of unwelcome surprises in IT services diligence. Get the consolidated position clear and current well before going to market, and identify which entities are in and out of the transaction perimeter early in the process.
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