Due diligence is the last round of price negotiation

Owners prepare for due diligence, the buyer’s review of the company, as if it were a test of honesty. They assume the buyer is checking whether what they said is true, and that it is enough to hide nothing.

The buyer is interested in something else. He is looking for items that can be turned into money. Fifteen B2B contracts that are employment in all but name can cost the seller PLN 5.7 million, and unpaid social security contributions and taxes are the smaller part of that amount.

The review takes place after the letter of intent, the preliminary agreement on price and on the terms of further talks, has been signed. The seller already knows the price but does not yet have the money. He is usually also bound by exclusivity, so during this time he does not talk to other buyers. His position is then the weakest in the whole process, and in practice the review becomes the last round of price negotiation.

In every industry the list of questions and documents for the seller runs to several hundred items from the same areas, and the problems recur with surprising regularity.

Every problem found in the review has two prices

The owner sees an irregularity as a closed matter. The problem lasted five years, so it needs to be priced and an answer prepared. The buyer sees two separate items. He calculates them differently and puts them in different places in the agreement.

The price for the past is a liability that has already arisen, such as unpaid contributions or unpaid tax. It has a finite value and expires with time under the statute of limitations. The buyer either cuts the price by the full amount or holds the equivalent in an escrow account. The seller receives that money only after the limitation period ends, provided nobody makes a claim before then. This amount can be argued over, because both sides estimate it and the buyer’s calculation is only one of several possible ones.

The price for the future is a permanent increase in costs from the day the transaction closes. It recurs every year, so it lowers recurring EBITDA, the annual operating profit before depreciation and amortization. The valuation of a mid-sized company is usually calculated as EBITDA times a multiple, the number of years of profit the buyer agrees to pay. Every zloty of permanent annual cost takes as many zlotys from the price as the multiple.

A company where fifteen people work on B2B contracts, although their work has the features of employment, shows this well. The arrears of contributions and tax for the past five years come to about PLN 2.5 million with interest. As the payer, the company must also pay the part of the contributions it should have deducted from their pay. Recovering those amounts from the contractors is doubtful. The whole arrears are the price for the past and go into escrow.

Moving these people onto employment contracts raises costs by PLN 400,000 a year, permanently. From then on the company earns PLN 400,000 less, so at a multiple of eight the price falls by PLN 3.2 million. That is the price for the future.

The arrears cost at most PLN 2.5 million, and part of that amount may return to the seller if the authorities do not claim it before the limitation period ends. The annual cost of PLN 400,000 is more than six times smaller than the arrears, yet it takes PLN 3.2 million from the price, PLN 700,000 more. The arrears are paid once. Lower profit enters the valuation multiplied by the multiple. At Capital One Advisers we calculate both prices separately for every problem a buyer might find.

Taxes, contributions and finance

B2B contracts that are employment in all but name are the most common problem found in Polish service and technology companies. The signs of an employment relationship are subordination, a set place and time of work, company equipment and no business risk of one’s own. Since 8 July 2026 rules have been in force under which a labor inspector can convert such a contract into an employment contract by administrative decision. As a rule the decision takes effect from the day it is issued, so arrears of contributions and tax for earlier years remain a separate risk.

The second area is transfer pricing, the terms of transactions with related parties. Missing documentation means a risk of penalties for past years. Prices that differ from market levels also weigh on the valuation going forward, because the buyer will bring them to market levels.

More and more often the buyer finds tax reliefs claimed without full documentation, especially IP Box and the R&D relief. A technology company that used IP Box for five years without the required records risks repaying the tax it saved, with interest. Losing the relief does not change EBITDA, which is calculated before tax. If the company does not meet the conditions for the relief going forward either, the higher tax will reduce its net profit and cash flow after the acquisition.

Withholding tax is another frequent gap. A Polish company should deduct it from payments abroad, for example for licenses or interest. A lower rate requires a certificate of residence, an official document stating the country where the counterparty pays tax. The problem arises when those certificates are missing for past years. The buyer also checks VAT deductions on invoices from counterparties of uncertain status, and benefits for the owner and his family that were not reported as income.

In finance, the first item is recurring costs presented as one-offs. The EBITDA bridge, the schedule that leads from the profit in the financial statements to the figure from which the buyer calculates the price, is built on such adjustments. The buyer checks every adjustment and asks whether the event really will not happen again. How this works in practice is described in the article on EBITDA normalization.

The buyer also sets the normal level of working capital and the minimum cash needed for day-to-day operations. Working capital is the money tied up in inventory and receivables, less what the company owes its suppliers. The buyer treats both amounts as part of the business, so he does not add them to the price as a surplus due to the seller.

Postponed replacement spending has to be split into two parts. Holding back the replacement of machinery for three years before a sale does not raise EBITDA, because buying machines is not a cost in the income statement. It does increase cash and lower depreciation. The buyer will calculate the overdue spending he will have to make right after the acquisition and deduct it from the price. If the owner also cut back on current repairs and servicing, which are costs, EBITDA was inflated and the buyer will adjust it downward. The price then falls twice: by the overdue spending and by the difference in EBITDA multiplied by the multiple.

The remaining financial items are slow-moving inventory and overdue receivables without write-downs, and the timing of revenue recognition on long-term contracts. Non-operating assets, such as an unused property, work in the seller’s favor. They belong to him separately, so they have to be excluded from the valuation of the business and settled separately.

Law, documents and operations

Copyright in the product is an item that can end a process regardless of the price. For employees, the rights to programs created as part of their duties pass to the employer by law. From B2B contractors the company acquires rights to code only under a written agreement transferring the economic copyrights. The agreement must list the fields of exploitation, meaning the ways the program may be used. Without the rights to the code the buyer cannot safely sell the product. When the rights are spread among twenty former contractors, the buyer will require them to be put in order before closing. With people who partly no longer work in the industry, that can take a year.

A change of control clause in an important contract does not fit the two-price split. A contract with the largest customer that lets it terminate after the company changes hands gives that customer the decision on whether the transaction succeeds. The buyer’s lawyers find such a clause in the first days of the review. The difficulty is that the customer’s consent cannot be obtained without telling it about the planned sale, so the seller puts that conversation off until the last weeks before closing.

Gaps in corporate documents cost little money and a lot of time. They most often concern the share register, resolutions passed without the required quorum, or a capital increase from ten years ago that cannot be reconstructed. To be safe, the buyer usually also asks for the spouse’s consent to the sale of the shares. In a sale process every week of delay gives the buyer an opportunity for more questions.

The buyer also checks legal title to real estate, permits and administrative decisions, and pending court cases. If the transaction needs clearance from the President of UOKiK, the Polish competition authority, closing moves to the day clearance is granted. The price usually stays the same, but the agreement must say who is entitled to the profit for the waiting period and which decisions the management board cannot take in that time without the buyer’s consent.

On the operational side the buyer checks software licensing, personal data protection, health and safety at work, and dependence on an IT system without vendor support. In manufacturing plants, environmental permits and the condition of the land often decide the fate of the transaction. A soil survey is best commissioned three months before the process. If the seller does not commission it, the buyer will, and the buyer will be the first to see the result.

Employees and customers

Unused vacation without provisions in the books and unrecorded overtime are small items individually, but they add up in a large workforce.

An investor who acquires a service company is buying above all its team. People who have nothing tying them to the company can leave a month after closing. A post-employment non-compete clause will not keep them. It only makes it harder to move to a competitor, and for employees it requires paying compensation. That is why the buyer also asks about bonuses and programs that tie people to the company for the period after the transaction.

A company’s dependence on its owner cannot be fixed with a document. A company in which the owner personally manages the relationships with the three largest customers becomes a different business once he leaves. The buyer prices this through an earn-out, a part of the price paid later and dependent on results, or by requiring the owner to stay with the company for two years.

Customer concentration rarely lowers the price directly. More often it changes the payment structure. When one customer accounts for 35 percent of revenue and can terminate its contract with three months’ notice, part of the price moves into an earn-out dependent on keeping that customer. The seller then learns that, for example, 30 percent of the price depends on a decision over which he has no influence after closing.

The buyer also checks dependence on suppliers that are hard to replace, and warranty obligations without provisions.

How to read this list

Items from the past have a finite value, so a seller with his own calculation and documents discusses them with the buyer on equal terms. Items that raise future costs are more dangerous, because they enter the valuation multiplied by the EBITDA multiple. The argument may be about the market rent, the cost of employment or the necessary servicing spending. The mechanism of the multiple itself is beyond dispute.

Items that do not lower the price directly change the way it is paid. The buyer then makes part of the amount depend on future results or holds money in escrow for longer. Sometimes he also holds back closing until the problem is removed. The cost of such items becomes visible only after the agreement is signed.

Four items can kill a transaction regardless of the amount: rights to the product spread among many people, contaminated land, no legal title to the property on which the company operates, and a change of control clause with a customer that brings in a third of revenue.

What preparation gives you

Preparation does not change how much the company really earns. If running it lawfully costs PLN 400,000 more a year, it costs that much no matter who calculates it first. With a buyer who will move people onto employment contracts after the acquisition, that part of the price is lost, because the company earned it only thanks to understated labor costs. An owner who puts the contracts in order a year before the process will go to market with lower EBITDA and receive a lower asking price.

There is an exception to this calculation. A trade buyer whose own team works on B2B contracts often has no intention of changing them after the acquisition. In that case he does not take PLN 3.2 million off the price, and negotiations concern mainly the arrears from the past. A private equity fund or an international group usually regularizes employment right after the transaction and deducts the full cost. Since July 2026, however, tolerating such contracts is riskier for a trade buyer too, because a labor inspector can convert them by decision.

Preparation does protect three other things. Arrears that the seller has calculated and documented himself are hard to challenge. That makes it possible to negotiate a lower escrow amount or replace it with a bank guarantee. Removing an irregularity, impossible in the seventh week of the review, is a routine task before the process. What matters most is how the talks go from there. The first serious problem changes the buyer’s attitude to the rest of the material. From that moment he looks for more problems in every document.

At Capital One Advisers we check all these areas together with the owner during the preparation phase, before the first contact with investors. The seller should price every item before the buyer does.

Before signing the first non-disclosure agreement (NDA), the owner should calculate a few amounts. For B2B contracts that are employment in all but name, these are the arrears for the period not yet time-barred and the annual increase in costs after the contracts change. Added to that are earnings after restating related-party transactions at market terms, and the value of postponed machinery purchases.

Four matters need to be checked in the documents before anyone outside the company hears about the transaction. Every EBITDA adjustment needs proof that the event was a one-off. The company’s rights to code and designs created by people on B2B and civil-law contracts must rest on written agreements, including for contractors from five years ago. A request for a signature sent to twenty former contractors just before the process gives away the plan to sell, and some of them will then ask to be paid. For the key managers, it has to be checked whether they have bonuses that will keep them in the company after the transaction. Contracts with the three largest customers should be reviewed for change of control clauses.

When to change the contracts

In this example, fifteen B2B contracts lowered the price by PLN 3.2 million and locked PLN 2.5 million in escrow. The first amount depends on whether the buyer moves people onto employment contracts. The second is set by whichever side first calculates and documents the risk.

The hardest decision concerns the timing of the change. Changing the contracts before the process protects the credibility of the other documents in the review. It does, however, lower EBITDA in the information memorandum that buyers receive before the first offer. The lower figure is then also seen by buyers who use B2B contracts themselves and would not demand the change. Changing the contracts is also, in practice, an admission that the existing ones did not reflect reality, so the decision is taken with a lawyer and a tax adviser.

Leaving the contracts in place makes it possible to start the process with higher EBITDA and see how individual investors treat the risk. The dispute then moves to the exclusivity period, when the seller is no longer talking to anyone else. The buyer can then demand both a lower price and a large escrow amount. Which route turns out cheaper depends on who the most likely buyers are and how many of them will be competing for the company at the same time.

Service: M&A advisory on a company sale