Searching Alone vs. Searching with a Partner

If You Want To Go Fast, Go Alone. If You Want to Go Far, Partner Up.

The quote in the title was the answer from one of my mentors when I asked for his advice on the solo-vs-partnered question and what ended up tipping the scales in favor of going the partnered-route for me.

For most people the tradeoff seems pretty obvious. You give up roughly half of the upside (even though partnered searchers have historically outperformed solo searches) and in return you have someone in the trenches with you to weather the ups and downs of searching. However, I think most people underestimate the impact of having a partner once it comes to running the company post-close.

There are some search models like accelerators that can offer some of the benefits of a partner by having cohorts of searchers and more involved advisors. However there is fundamental difference between having an outside sounding board and a someone rolling up their sleeves with you.

Searching is the shortest part of the journey, the true value of a partner comes in the operating phase.

While timelines vary, a typical successful search fund timeline looks something like this: 2 years of searching, 5 years of operations, exit. Even when taking into account that ~1/3 of search funds don’t close a deal, you still end up with over 3 years of expected operating time. Taking into account that not all searchers take 2 years to find a business and a some companies are held much longer than 5 years, it’s not unreasonable to expect the average searcher to spend more than twice as long operating the business than searching for it.

At the beginning of the search, it’s natural to only focus on the benefits of having a partner while searching. It can be difficult to consider several years of business operations at some point in the future, when you have no clue what company you might buy. But given you will spend most of your time in the operating phase, understanding the impact of a partner in that time period is important.

First, we all have heard the old adage of working in the business vs. on the business. The owners of most companies in the self-funded size range are heavily involved in the operations. While you might be able to optimize some of the processes, as a solo searcher you will likely spend the majority of your day time working in the business initially, so growing the business becomes a nights-and-weekends project. It’s easy to burn out running that schedule for several years. In a partnered search, you have an extra pair of hands from the beginning and the pace becomes sustainable for the long run.

Second, owners naturally have a more meaningful incentive (equity value) to care about the business than employees. With a partner you have someone with the exact same incentives to cover for you if you need it. Over a 5 years operating period, it’s pretty likely that something will come up that will take you out of business operations for several days, or maybe you just want to take two weeks off after a few years.

Third, you can run your decisions by someone on your level. This function can also be provided by an advisory board or some of your employees if you trust they will speak up if you are making a mistake. But again, neither of those two options have as much of an incentive to make sure the decision is right.

Partnering up means spreading your bets and increasing your odds of finding a company

Think of entering a Poker tournament where the winner gets $1mm, second gets $500k and so on. You can play by yourself or you make a deal with one of your buddies that you will share your winnings 50/50. By making the deal, you are lowering your maximum upside (if you come in 1 and 2, you both get $750k), but you doubling your chances of winning something (assuming you’re equally good at Poker).

This type of staking is common in Poker, because you have a low probability of large winnings. By spreading your odds, you give away the extreme upside, but you win more often / consistently. More recently, this approach has become common for minor league baseball as well.

Searching shares some similarities to these examples. I’ve previously written about the odds of finding a company. By partnering up, you are doubling your network, number of companies you can source, potential investors etc. In reality, it’s likely not quite double since you have overlaps, but you get the idea.

Right time, right place, right person: downsides of partnering up

To be clear, there are plenty of downsides of doing a partnered search. First of all, you need to find the right partner. It’s hard to find someone that is a personal fit, looking for the same as you (industry, geography) and who’s timing lines up with yours. The benefits of having a partner can easily be outweighed by having to make unreasonable compromises (i.e. buying a business in a location you don’t want to live in).

Additionally, partnering up increases the minimum size business you can buy, which means you have less businesses you can buy. The bank will require both of you to have adequate salaries (At the very least $50k, but they will ensure you can cover your ongoing costs). For smaller businesses (<$500k EBITDA), adding $200k of salaries for two partners can result in the loan breaking debt service covenants, while it wouldn’t for one $100k salary.

There is always the risk of personal differences occurring years down the road. However, those issues can usually be resolved by having deadlock provisions in your operating agreement.

And lastly, if you buy the business together, you only get up to $5mm of SBA loan combined rather that $10mm. As a solo searcher you can maximize the upside of having to sign a personal guarantee by maxing out your SBA loan (larger business, more upside). In a partnered search, you have the same downside (bankruptcy), but you only get half the upside¹.

If You Want To Go Fast, Go Alone. If You Want To Go Far, Partner Up.

As with many other aspects of searching, personal preference play a large role in making the decision whether to go solo or partnered. Nevertheless, in my opinion the benefits of having a partner outweigh the costs assuming right time, right place, right person. The search fund chapter will last 5-10 years from start to finish for most searchers. Choosing a model that is sustainable and enjoyable is the key to both realizing the full potential of the business you buy and making the search fund chapter a fulfilling one from a personal perspective.

1. There are some structures to maintain the $10mm SBA loan total by one partner buying a company with the other owning less than 20% and then using the same structure buying a second company just reversed. But then all the other benefits of operating a company together fly out the window.