Often times in a negotiation the leverage changes from one party to another. Think about in business sales or buying a car, once the buyer tips their hand that they have chosen a certain deal, the sell side can sometimes be emboldened into applying what I feel is a dirty trick. Escalation.
What ever the excuse is, the seller (in this case) would raise the price or terms even though the deal had been agreed to. They often use an authority tactic, think about the car salesperson that goes back to the “managers office” and comes back with a slightly elevated monthly payment. Full of apologies that the deal they thought they could offer was expired, or misstated.
We also see the haircut tactic employed by the buy side. Imagine a buyer of a business under a contract that has a due diligence period contingency. The buyer then spends a couple of weeks crunching the numbers and announces they will not move forward due to some unforeseen liability or risk. They then renegotiate the price or terms. Sometimes an escalation or haircut can be legit. Often demand could change for a deal or a unforeseen risk could pop up unbeknownst to either party.
However, in my experience I often see this tactic used in bad faith and planned way in advance. I have even seen it used POST closing. Such as when people use an item and return it, taking advantage of retailers generous return policy. Or buyers that will refuse to pay earn-outs or notes just in order to renegotiate.
The best defense for this tactic is to have options. Be ready to walk from a deal at anytime. And to defend against post closing haircuts, have good paperwork and documentation in any deal! And have good legal and intermediary team.
Andy Cagnetta owns and operates Transworld Business Advisors. He joined the company as a sales associate and later purchased it. Transworld is an international franchise business and franchise brokerage, with thousands of businesses for sale and franchisees in the United States and Internationally.