Purchase vs Partner and How to Structure?

September 24, 2024

by a searcher from Harvard University in Cambridge, MA, USA

Hi Searchfunders —

Self-funded searcher here very interested in manufacturing. I did an outreach to owners of architectural millwork + custom cabinetry businesses last week resulting in (so far) 6 calls with owners. What I’m finding thus far is that owners are more interested in a partnership than sale, and this might be an interesting arrangement for me too, a way to derisk this process. Some more detail:

The companies have $1m - $2m in revenue, minimal marketing and systems but (so far) solid technical/woodworking teams. Only mildly profitable but room for growth. I would bring tech, financial, and people skills, decent familiarity with the domain (woodworking + residential construction), and would hope to add significantly to the top and bottom lines.

I’m open to a partnership where I’d work alongside the owner for sweat equity and eventual buyout. (Lest anyone wonder, I am temperamentally ok with this and have been around the block/likely have the maturity to navigate this). Any thoughts on how to structure such a situation? Has anyone seen or explored such a thing before?

Thanks in advance for any insights.

Reply by an investor
from University of Witwatersrand in Johannesburg, South Africa

I structured a partnership for a similar situation.

It was for a retailer who launched an eCommerce platform.

In summary what I did was structure a "pilot" period - say 6 months with a defined goal or milestone.

Clear roles and responsibilities as well as commitment to funding marketing/growth/ systems is a must.

Clear profit share/participation during the pilot, post pilot for both upside and downside scenarios should be agreed from the beginning.

Once the goal is achieved, this triggers a more formal arrangement or structure based on mutual objectives.

By doing it this way, you can get started fairly quickly, and test whether you can actually improve revenue/ cost efficiencies before committing too much time/capital.

Hope this helps, happy to chat further.

Reply by a professional
from University at Albany, State University of New York in Delray Beach, FL, USA

Rachael, I've encountered many entrepreneurs who would love services that add to cash flow for sweat equity when they retain control, don't have to make cash distributions and can't be forced into an exit. Unless you can structure a deal which gives you a path to control via sweat equity or cash investment, you might find that most of these partnerships generally add value one way. I think it's less a question of how to do it and more a question of... do you really want to.

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