I presented a seller with an LOI this week in a highly niche/technical space. The company manufactures parts for use in the semiconductor space. The seller came back and said "I know there are ways to improve the efficiency of the manufacturing process even further, and after considering your offer I feel I need to do that before I sell". Obviously seller has cold-feet, doesn't want to let go of his baby, and believes the company will be more valuable with another 6 months of effort. However, the seller is open to other ideas about how to structure a deal that he feels compensates him for the effort he aims to put in. I originally proposed an earnout tied to sales, but his goals to make the company more streamlined would have an impact on the bottom line if anything, and an EBITDA tied earnout is messy/complex to manage. I could just raise the price, but I don't want to do that on faith the seller's improvements will materially move the needle for the business. I could retain him as an employee, or let him keep some of the equity in the business? Any other ideas on how to align interests here? This is an unsophisticated/off-market/technical seller that has built his business over the past 20 years. We have a good relationship, he's clearly not trying to just claw more money out of me, it just seems he is hesitant to sell in its current state because he's emotionally attached.
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What type improvement is he going to make? Can he demonstrate the potential direct impact on profitability in a way that makes sense to you? If it’s a manufacturing process improvement, you can take baseline gross profit on current/historical sales and give him a portion of the increase that’s attributable to the improvement (to the baseline only – no additional compensation for increased post-acquisition sales), and perhaps cap it to bridge the gap. If the economics work in both of your favors and it’s a good deal with a low/reasonable unconditioned purchase price, it may be worth pursuing.
Administrative process improvements will be more difficult. The seller might just not be ready to sell and you risk wasting time and effort.
Adel is right though in that it’s never-ending – what sort of miraculous change can he really make that will materially increase the value of the company in the next six months and why hasn’t already implemented it in the last few (or 20) years?