Partnered Self Funded Search - How to Split Equity Unequally?

searcher profile

December 20, 2024

by a searcher from Lehigh Univervsity in Boston, MA, USA

Looking for general advice on how partnered searchers split equity in atypical situations. Keeping this particular scenario at a high level...

Purchase Price = $5M
Equity = $2.5M
Debt = $2.5M

"Searcher A" brings 100% of the $2.5M in personal capital (yes, purposely not fully levering). "Searcher B" provides zero capital but has related operating experience in the target company. Both searchers plan to work in the business. And assume both searchers will have to personally guarantee the debt since they'll be above the ownership percentage threshold.

Any advice or guidelines on how to fairly split the ownership?

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commentor profile
Reply by a searcher
from INSEAD in San Francisco, CA, USA
There's no way you should be considering your capital any different from another investor's capital. Its equity, so treat it as such and identify the appropriate returns (e.g., 30%+ IRR) that make the deal make sense. Of course, sweat equity counts for something too so figure out what split of preferred return, step-up, and final equity (a) gets you your return and (b) makes the deal worth it for you and your partner from a sweat equity perspective.
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Reply by an intermediary
from Boston College in Mansfield, MA, USA
90/10. Implement an "earnout" or stock purchase plan the 10% partner to buy back shares until you reached an agreement upon share ownership allocation. My 10% is arbitrary it could be 5% or 20%. It really depends on the operating value discrepancy .

If you agree the end game is 50/50, th 10% partner could pay would have rights to 50% of the distributions, but would "pay them" to the 90% owner until 50% equity is achieved.
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