Advice on a partnering rather than acquiring (at least right away)?

by a searcher from University of Pennsylvania - The Wharton School

2 years ago

Hi Searchfunder community,

I'm a self-funded searcher.  As part of my outreach, I have been talking with a current owner who has developed a great product in a fast-growing space, but has not implemented any real practices around sales, marketing, or operations.  (For context, the owner comes from a deep-tech background--the company is on track to do ~$3M in annual sales this year due to the strength of the product, with very immature operations).  

For many reasons, the owner would rather partner with me to grow the company before potentially recapitalizing and/or fundraising.    We're still early in conversations, but this seems like a compelling offer (especially given the owner's expertise and match with my skillset, plus the chance to de-risk the opportunity).  Does anyone have experience with this type of arrangement?   Any recommended advisors or lawyers who might be helpful to work with?

Thanks!

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2 comments

intermediary from Ryerson University - Ted Rogers School of Management

I have seen some that have gone really well and others that have gone poorly. Ultimately trust is critical in a partnership especially if the energy, approach and level of involvement is not aligned which can breed resentment when one person is working harder than the other. One of the common issues is that a young motivated operator comes in and starts to grow the business and all of a sudden the seller doesnt want to sell seeing that they now have such a good partner running the business and making them richer! To avoid this, you need to spell out a potential exit strategy upfront that is well defined and cannot be changed. Negotiating a call option at a pre-specified exit multiple is one way to do it within "x" amount of years.

2 years ago | like reply | 0 likes

professional from The Johns Hopkins University

This type of arrangement can work, but its success is most often driven by setting proper expectations on the part of both parties. By way of a single hypothetical (there are many to consider), if you come in and set/clean up processes and that $3M in sales doubles, this may make the potential seller reticent to sell. Thus, you need to set parameters at the outset and ensure that you are fairly compensated in whatever form. Good luck!

2 years ago | like reply | 0 likes

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