Vendor Due Diligence: Protecting Value and Price in Company Sales

JUDr. Jakub Dohnal, Ph.D., LL.M.
JUDr. Jakub Dohnal, Ph.D., LL.M.
15.4.2026 | ARROWS law firm

When a serious buyer comes forward, due diligence begins – and with it tough price negotiations. This is often where it is decided whether the seller will achieve the expected price or whether the price will drop sharply. The key to protecting your position is not improvisation, but advance preparation, legally sound structuring of the valuation process, and clear documentation of what you are handing over. Find out how to do it.

In the image, we see experts specialising in the due diligence aspects of a company sale.

Why the price drops during due diligence and what the seller can do about it

The fundamental problem starts here: during the due diligence process, the buyer has the opportunity to examine the company in detail. As soon as the buyer, their advisors and lawyers come across unexpected issues—whether legal, tax or financial—price negotiations begin. This is not the buyer’s mistake. It is information asymmetry.

The seller knows their company, but the buyer is only examining it now. If over the years the seller has knowingly or unknowingly “covered up” issues, or simply failed to present them clearly, the buyer can afford to negotiate more aggressively.

Our Prague-based law firm, which has been involved in preparing company sales for years, knows that the seller’s best defence is not claiming that “everything is fine”. The defence is thorough, transparent preparation that is properly documented from a legal perspective. If the seller carries out so-called vendor due diligence (a seller-side review), many risks can be eliminated before the buyer discovers them and uses them as leverage to push the price down.

What vendor due diligence is and why it protects the seller

Vendor due diligence means that the seller takes the initiative and commissions their own independent legal, financial and tax review. The goal is not to hide problems—quite the opposite. The goal is to identify and resolve them before the buyer learns about them.

If, based on vendor due diligence, the seller finds that they have unpaid obligations to employees for unused vacation, they can resolve it before it surfaces in the sale process. If they discover that a long-term contract with a key customer contains a clause allowing the customer to terminate it unilaterally upon a change of ownership, they can discuss an amendment with that partner now.

ARROWS clients can therefore, including with the support of lawyers from ARROWS advokátní kancelář, ensure that their prepared documentation is clear, complete and credible. At this stage, it typically pays off to rely on experience with company sales and transaction advisory so that the vendor due diligence is practically usable for negotiating the purchase price as well. This significantly strengthens the seller’s negotiating position.

How the parties share risk: valuation and its legal links

This brings us to the core of the matter. A company’s price is not merely the result of a mathematical formula. It is the result of a contractual arrangement between two parties, each of whom sees the future differently. That is why modern M&A transactions use specific mechanisms to address this allocation of risk.

Basic valuation approaches and how they are reflected legally

In practice, we most often encounter three basic approaches to valuation:

Asset-based valuation is based on an individual valuation of specific asset items—real estate, machinery, inventory—and the deduction of debts. This method is most commonly used in an asset deal, i.e., the purchase of specific assets rather than a shareholding in a company. The tax and legal implications of the difference between an asset deal and a share deal are also summarised in the update Acquisition and sale of a company 2026: Key tax differences between an asset sale and a transfer of a business interest. From a legal perspective, it is then crucial that the buyer does not acquire the legal entity with all its historical ties and issues, but only specific things and rights.

Income-based approach (income-based, typically DCF – Discounted Cash Flow) assumes that the value of a company is determined by the future cash flows the company will generate. This is precisely where the key concept of goodwill appears—the difference between the valuation of individual assets and what the buyer is willing to pay for the company as a functioning whole.

Goodwill in accounting terms (under IFRS 3) represents the purchase price minus the net fair value of identifiable assets and liabilities. This is the riskiest part for the buyer, because it depends on whether the future profits actually materialise.

Market approach is based on the prices at which similar companies are sold. Legally, this method is the most problematic because “similar companies” may not truly be comparable—they differ in culture, customers, geography, legal history, employees, etc.

The legal link between valuation and the purchase price

The key point is this: the purchase price is not separate from the valuation estimate. To ensure that this relationship between valuation and price is reflected in the documentation in a clear and enforceable way, it makes sense to address it already when preparing contracts and negotiations.

If the purchase agreement does not state anything specific, there is a risk of court disputes over what was actually being purchased. That is why ARROWS attorneys always recommend that the purchase price be defined precisely in the document. Not only as an amount, but also as the method of determining it—whether it is a fixed price, a price calculated according to a specific formula, a price agreed subject to an expert valuation report, or a combination of these elements.

Each choice has legal consequences. Practical examples of how to set the definition of the purchase price and related mechanisms to minimise future conflicts are also discussed in the update Dispute prevention in a holding structure: Setting contractual relationships between affiliated companies. If a fixed price is agreed, all risk is borne by the party who accepted it—if it is later found that the company was worth less, the party who pushed for the price can no longer step back. If, on the other hand, it is agreed that the price will be determined only after due diligence, issues arise as to who the valuer will be, which method will be used, and how the parties will argue about the outcome.

Table of typical risks 

Potential issues

How ARROWS helps (office@arws.cz)

Hidden debts, unpaid wages, unpaid vacation: The buyer discovers them during due diligence and reduces the price.

ARROWS attorneys will review employment-law liabilities, social security and health insurance, prepare a list of all debts, and help resolve them before they surface in the sale process.

Invalid or risky contracts: Long-term contracts with customers or suppliers contain clauses allowing unilateral termination upon a change of owner.

ARROWS attorneys will map all key contracts, identify change-of-control clauses, and help amend them or negotiate with the contractual counterparties.

Unclear ownership of intellectual property: Patents, trademarks, software, or data are not clearly registered or are non-transferable, reducing reputational and commercial value.

ARROWS will arrange a legal IP audit, complete missing registrations, and prepare documentation evidencing ownership and the completeness of protected assets.

Tax risk and transfer pricing: The buyer finds that the company does not apply transfer pricing, has tax arrears, or depreciates assets incorrectly.

ARROWS attorneys and tax advisors will conduct a tax audit, prepare corrective filings, help resolve disputes with the tax authority, and prepare credible tax documentation for the buyer.

Goodwill and intangible assets are not documented: The buyer cannot see where the company’s value comes from and therefore does not trust it.

ARROWS will help articulate and legally document goodwill (customer base, know-how, reputation) so that it is credible and defensible.

How buyers try to fight over the price: practical mechanisms

Experienced buyers and their advisors know several legally actionable mechanisms to “protect” the price during the process and afterwards—or to reduce it. Sellers must understand these mechanisms in order to defend against them or negotiate them properly in advance.

Purchase Price Adjustment (PPA) and its risks

Purchase Price Adjustment means that the price is calculated preliminarily first (typically upon signing the agreement), but the final price is determined only later—usually after the so-called closing (final transfer). The most common PPA mechanisms are:

Completion accounts – the buyer prepares financial statements as of the closing date and the final price is calculated on that basis. If working capital (current assets minus current liabilities) on the closing date is lower than agreed, the price decreases.

The legitimacy of such a reduction is then usually addressed in a dispute between the parties, often through an independent expert. The seller often suffers here because the buyer has the best access to the data and is tempted to interpret the data to its advantage.

Locked box – by contrast, the figures from historical (closed) financial statements are agreed and the price no longer changes. However, the buyer will require the seller to guarantee that no value has leaked out of the company between the date those historical financial statements were prepared and the closing date (so-called “leakage”). If the seller undertakes risky financing or extracts money contrary to the agreement, the buyer may recover it from the retention amount or from an escrow account.

ARROWS, a Prague-based law firm, has extensive experience with this: in a locked box scenario, thorough preparation and agreeing all details before defining the “box date” is essential. Once the box date is set and locked, the seller is protected by carefully negotiated clauses on prohibited leakage and careful monitoring of compliance with these obligations.

Earn-out and its legal and commercial risks

An earn-out is a mechanism where part of the purchase price is not paid immediately, but gradually, depending on how the company performs after the buyer takes over. For example: the buyer decides to buy a company for CZK 100 million, but agrees that the seller will receive CZK 30 million only if the company maintains revenues above a certain level over the next two years. 

After the transaction closes, the seller loses control over the company—and the buyer often does not even realize it: if, after the takeover, the buyer significantly changes strategy, lays off key employees, relocates production, worsens quality or customer service—and all of this with the aim of pushing revenues below the level that would trigger the earn-out—no one will prevent the buyer from doing so unless it is contractually addressed.

In such a case, the buyer will often simply state: “The company did not earn what you promised, so the earn-out was not triggered.”

ARROWS attorneys recommend that these scenarios be addressed directly in the earn-out agreement: e.g., that the buyer undertakes to operate the company at least at a certain quality level and with a defined standard of care, that the customer portfolio must not be materially changed, or that certain strategic decisions must be made with the seller’s consent during the earn-out period.

Valuation Adjustment Mechanism (VAM)

A lesser-known but, in some sectors (e.g., venture capital, private equity), very widely used mechanism. A VAM is a set of rules that allows the parties (typically investors and founders/managers) to adjust their respective equity stakes or cash consideration if the company later develops differently than expected.

For example, if a clause states that if the company does not reach a value of XY within three years, the buyer will buy back part of the shares at a lower price (so-called “down round” or “anti-dilution” mechanisms).

Most common questions on valuation and pricing mechanisms

1. Should we sell for a fixed price or allow a price adjustment?
That depends on how well you know your company and how confident you are about its development. A fixed price gives you certainty, but if unexpected risks appear in the closing accounts, you can no longer change it. A price adjustment gives you flexibility, but also creates room for disputes. ARROWS attorneys recommend: if your documentation is clean and reliable, opt rather for a fixed price and additionally negotiate sufficient warranties and a retention amount as protection. If you are concerned that problems may be hidden in the company’s documentation, it is better to accept a price adjustment, but clearly agree in advance on the rules under which it will be calculated.

2. What does it mean that the price is calculated without cash and without debt?
In the technical language of M&A, it is said: “the price is cash-free debt-free.” This means that the buyer pays for the company’s operating assets and liabilities, but not for cash on hand or existing debts. This prevents the seller from withdrawing all money from the account shortly before the sale and leaving the buyer with all the debts. From a legal perspective, it is essential to clearly agree what counts as “cash” and what counts as “debt”—whether it includes lease liabilities (e.g., under IFRS 16), deferred tax, interest, etc.

3. What is the role of an expert report in the process?
An expert report is not mandatory if the parties agree on a fixed price. However, it carries significant legal weight: if the report is prepared by a qualified expert and is methodologically sound, courts generally take it seriously. The seller should therefore consider having their own expert report prepared—both as a defensive tool and as a basis for negotiations. The attorneys at ARROWS can arrange a legal review and prepare the supporting documentation for the expert.

What goes into the valuation question: elements you must not forget

1. The difference between price and value: A fundamental distinction: value is an estimate—what we believe the company is worth. Price is the result of an agreement between two parties. In a sale process, it starts with a valuation report (an estimate of value) but ends with a contractual agreement on the price.

It is precisely in the interim period that the most important negotiations take place: the buyer argues that the value is lower because, during due diligence, they discovered an issue that reduces future profits. The seller maintains that the issues are either standard in the industry or can be resolved.

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2. How profit is normalised in the valuation model: This is where a very important technique used by both lawyers and valuers comes into play: profit normalisation. This means taking historical profit and adjusting it for one-off items, unusual transactions, and income or expenses that will not recur.

Example: the company had a terrible year because it had one major repair or an arbitration dispute. If this item is not properly documented and defended, the buyer will assume it was a normal expense and will value the company based on reduced profit. The attorneys at ARROWS will help prepare this normalisation and document it credibly.

Final summary

When a seller waits for a buyer and then the price unexpectedly drops during due diligence, it is not a coincidence. It is the result of insufficient preparation. The attorneys at ARROWS see it all the time: companies that are excellent at business are not prepared for a sale. They have not mapped their risks, they have not documented their assets, and they have not addressed legal and tax “thorns”.

Valuing a company is not just a financial model. It is a legal, tax, and commercial undertaking that brings together six months to a year of preparation. Only a company prepared in this way can defend itself against price reductions during due diligence.

If you do not want to risk losing millions in “price-chipping” negotiations, entrust the sale preparation to the attorneys at ARROWS, a Prague-based law firm. They know every trick buyers use to push the price down and know how to defend against them. Contact us at office@arws.cz and let’s start preparing.

FAQ - Most common questions on company valuation and the purchase price

1. Can the seller increase the price if they believe the expert report is too low?
It depends on the arrangement. If the purchase agreement states that the price will be determined based on the expert report and both parties agreed on the expert, then the seller is bound by it. However, if the parties agreed that the report is only guidance and the price must be negotiated, then yes. The attorneys at ARROWS will help you properly agree how the report will be handled and what weight it should carry in the process.

2. What are the three most common mistakes sellers make in valuation?
First: they are not prepared throughout the year. Then, when a buyer appears, they do not have the numbers ready. Second: they let the valuation be dictated solely by the buyer and the buyer’s advisers, instead of having their own prepared. Third: they do not see the difference between what they think their company is worth (a subjective feeling) and what it is realistically able to generate (objective cash flow). 

3. What should I do if, during closing the transaction, it is discovered that the financial data I provided is not correct?
That is difficult. If the data is knowingly false, you risk breach of contract and the buyer’s claims for damages (so-called indemnity claim). If it is only a mistake, you should disclose it as soon as possible. 

4. Can the buyer reduce the price on the day of closing if they find that the figures in the closing accounts differ?
Yes—this is precisely why completion accounts and price adjustment mechanisms are used. If the purchase agreement states that the price will be adjusted based on the closing accounts, then the buyer may refer the matter to an expert dispute or arbitration. If a locked box is agreed, the figures should be locked weeks in advance and adjustments are only possible based on carefully negotiated leakage clauses. The attorneys at ARROWS will help you draft these clauses correctly.

5. What are the most common ways a buyer “protects” the price after signing?
Three main ones: (1) escrow/retention—part of the price is held in a special account for 12–24 months as security in case warranties are breached; (2) earn-out—part of the price depends on the future performance of the target company after the acquisition; (3) reps and warranties insurance—insurance covering financial risks arising from breaches of the seller’s warranties. The attorneys at ARROWS will help you understand these mechanisms and negotiate them properly.

6. Is it better for the buyer to have the valuation prepared, or the seller?
Ideally, a combination. The seller has their own valuation prepared (vendor assessment) so they know where they stand and have an argument. The buyer then has their valuation prepared. If the valuations differ significantly, an independent expert is usually appointed or a mechanism is agreed to average the figures. The attorneys at ARROWS will help you manage the preparation and negotiations.

Notice: The information contained in this article is of a general informational nature only and is intended for basic orientation in the matter based on the legal status as of 2026. Although we take maximum care to ensure accuracy, legal regulations and their interpretation evolve over time. We are ARROWS advokátní kancelář, an entity registered with the Czech Bar Association (our supervisory authority), and for maximum client protection we are insured for professional liability with a limit of CZK 400,000,000. To verify the current wording of regulations and their application to your specific situation, it is necessary to contact ARROWS advokátní kancelář directly (office@arws.cz). We accept no liability for any damages arising from the independent use of information from this article without prior individual legal consultation.

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