Many small to mid-size businesses have an active owner(s) whose role will have to be replaced when they choose to sell their business. If there isn’t an employee within the organization to take over the outgoing owner’s role, it can become difficult to find the right buyer who has the time and financial capacity to purchase the business. In these types of scenarios, the likely buyer is often some sort of partnership between two or more parties.
Often times a partnership works particularly well when one party is looking to be a passive or “silent” investor (we’ll call them the Investment Partner) and is looking for someone to actively run the day-to-day operations (we’ll call them the Operating Partner).
This type of partnership is a great solution when the Investment Partner has the financial capability to purchase the business but isn’t looking to run it while the Operating Partner is looking to own and operate a business, but does not have the financial capability to purchase the business on their own.
Since the Operating Partner likely isn’t contributing as much money to the deal upfront, they often will take a minority equity position. Alternatively, they may work out an arrangement with the Investment Partner to compensate them for the “sweat equity” they’ll be contributing to the business. Ultimately, the arrangement between the partnership is up to them and there is no “one size fits all”.
We see this model of two or more groups purchasing a business becoming more and more common. Generally speaking, there are lots of Investment Partners out there who are looking to invest in good businesses, but they need Operating Partners who want to put in some equity, work the business, and participate in the growth.
Often times, the Investment Partner is a past entrepreneur and can act as mentor for the Operating Partner who may be a first-time entrepreneur with industry or managerial experience.
Reach out to us today if you think you fit the mold of an Investment Partner or Operating Partner – we just might be able to connect you with a potential partner to set you up in purchasing your first business as a partnership!
Peter MacSwain, CPA