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Next owners never lost money
What the survey found
Search fund companies are small businesses bought and run by a first-time CEO backed by a pool of investors. A group of search fund investors surveyed the next owners of those companies that had been sold on, using a sizable data set built over a long time. The results were remarkably consistent. On average, those next owners earned returns in the low to mid 30s as an annual rate and multiples of invested capital of roughly 3.5 to 4X.
Of the mid-40s number of companies in the study, not a single one lost money. There was not one example of capital impairment. The results raise the possibility that some of these companies are sold quite early, which points to the power of longer duration.
The 20-year hold
So the acquisition-driven companies set up since have explicitly longer holding periods. For one of the earliest, a 20-year hold was the plan from the outset. At every board meeting, page two of the board deck reviews the strategy and philosophy and describes a 20-year hold from today, updated each time so the management team and the investors stay in sync.
Why do most buyout funds sell so soon?
Buyout funds are usually set up as closed partnerships that must return cash to their investors before the partnership ends. They invest during the first several years, and each company has to be sold within a limited holding period after that. A company still growing at the time of sale hands the rest of its growth to the buyer. The standard life of these partnerships is about ten years, with extensions possible.
How does holding longer help compounding?
Selling a business triggers taxes on the gain and fees to bankers and lawyers, which shrink the money available to reinvest. A business that keeps compounding inside one company avoids that leakage. Berkshire Hathaway has long stated that it intends to hold the businesses it buys permanently.
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