The Case For Ten-Year Holds In SMB Acquisition
Most search funds run a five-year clock. I think that math is wrong for the kind of small businesses worth buying. Here is why I commit to ten.
When I tell sellers I plan to hold the business for ten years, the most common reaction is a long pause and then some version of "you are the first acquirer who has said that." Most search funds and PE-style buyers run a five-year clock. I have come to believe that math is wrong for the kind of businesses I want to own, and the seller's reaction tells me they have been wondering about it too.
Why five years is too short
A traditional search fund holds for five years because that is what the LP math demands. The LPs want liquidity. The fund wants to recycle capital. The searcher needs an exit story to raise the next vehicle. None of that is about the business itself.
The five-year clock changes how the operator behaves. Year one is integration. Year two is finding quick wins. By year three, attention shifts to making the income statement look good for a sale. The unglamorous investments, the equipment we should have replaced, the technician we should have promoted, the customer service overhaul, all get deferred because they would not show up in the trailing-twelve EBITDA in time to influence the exit multiple.
What a ten-year hold lets us do
When I commit to ten years up front, I get to make decisions the five-year operator cannot afford to. Replace the old fleet in year three because the maintenance economics get better in year five. Promote the technician with the best patient feedback into a route supervisor role even though it costs us a year of productivity. Raise prices five percent across the customer base because the relationships will outlast the temporary friction.
These decisions compound. Most of the value in a well-run small business shows up between years six and nine, and the operators who get to capture that value are the ones whose investment horizon extends that far.
What the seller actually gets out of this
A seller selecting a ten-year buyer is selecting for a different kind of stewardship. The legacy of the business survives. The employees who built the company alongside them keep their jobs. The customers who trusted the brand keep getting the service they paid for.
I know that matters to most sellers because every conversation I have eventually gets to it. Price is important. So is the answer to "what happens to my people."
A ten-year commitment is not a marketing position. It is the operating math that lets me run the business the way it deserves to be run.
Written by Ramy Stephanos, SFAdvisor - Acquire.