The economy is slowing down and there is an opportunity for you to purchase competitors to consolidate businesses in your industry. The problem is that the competitors know that their sales are down, profit is down, the company is not worth what it was a year ago. They are young and in no hurry to sell so they are thinking that they will wait for the economy to improve, have three good years of profit then they will think about selling in 5 years time.
Your game plan is that you want to be ten times your current size in 5 years, you do not want to wait in the future, you want to take advances of economies of scale and build a larger company today. You approach a business owner and the first thing they say, I will sell if I get my price. However, the price may not be realistic. If the owner is young and he has time on his hands, the company is still profitable but not as profitable, he will wait until he gets his price. He knows that the business will recover. What about making offer and let him participate in the upside. If sales were $10 million before the economy crashed, now they are $5 million but the owner has just signed on with a new customer who may make up for most of the loss in sales, give the old owner an incentive.
In my example above, let’s say that they owner wanted a price of $1 million but the business is only worth say $500,000 today. The business owner will not sell unless he gets his magic number of $1 million. Make him an offer for $1 million however, the offer is contingent in the company achieving a certain profit and sales level. If these factors are not achieved in say 3 years, the purchase price is ground down from $1 million to say $500,000. This is the same as saying I will pay you $500,000 today and an incentive plan to get you to the million. For whatever reason, owners like to boast what the offer said, one says $1 million, the other says $500k. The net pay may be the same but one sounds must better than the other. Most sellers of businesses will take the $1 million offer. You can compare this to a glass, is it half empty or it is half full. Both answers are identical, it just depends on how you describe the situation.