The Search Fund community has evolved over the past thirty years and includes a highly successful group of investors, operators and advisors. Many current investors in the search fund community are entrepreneurs that have enjoyed considerable success utilizing the search fund approach to acquire and manage businesses themselves. The collective experience and network of this community is a key differentiating attribute for those entrepreneurs and business owners considering a partnership.
Entrepreneurs benefit from this community in the following ways:
Credibility – Entrepreneurs who attempt to acquire a middle market business without a committed group of investors will likely be met with skepticism when approaching business owners. Key concerns will revolve around the entrepreneur’s ability to finance the transaction, as well as the entrepreneur’s ability to manage the company post transaction. The Search Fund community provides immediate credibility by validating the entrepreneur’s abilities and reinforcing access to capital.
Broad-Based Access to Capital – Search Fund entrepreneurs typically incorporate 10-20 individual and institutional investors in their search entity. In the event that one or more investors pass on the required investment to complete the acquisition, other members in the group are able to make up any funding gaps. This broad-based access to capital ensures a high probability that entrepreneurs can fund and close on their targeted acquisition.
Diversified Collective Experience – Each investor brings a unique set of experiences and network. Search Fund entrepreneurs will find that the collective experience and network are a very powerful advantage when evaluating industries and businesses as the community can assist with deal vetting and make introductions to industry experts and M&A related advisors. After an acquisition has been made, operators will find this network to be tremendously helpful when executing operational initiatives.
Active Investment – Search Fund entrepreneurs typically hail from top-tier MBA programs. Despite having tremendous potential, most entrepreneurs have never acquired or operated a company as CEO, and therefore are tremendously benefitted by guidance throughout the process. The Search Fund community enjoy getting to know entrepreneurs and mentoring them throughout all aspects of their search. Specific examples include assistance with evaluating investment opportunities and due diligence, as well as making introductions to relevant professionals including lenders, lawyers, accountants and industry expects. Once an acquisition has been made, key members of the investor group will serve on the Board of Directors and will take an active role in developing entrepreneurs as leaders and in executing growth strategies. This guidance is particularly valuable during the early stage of operational transition and often plays a critical factor in the ultimate success of the deal.
Financial Support – The operating capital that is initially raised to conduct the search represents a distinct advantage relative to those entrepreneurs who seek to acquire a business on their own. Search Fund entrepreneurs are paid a salary throughout their search and have adequate capital to finance office space and infrastructure, travel and due diligence related expenses. In addition, entrepreneurs benefit from existing legal and accounting relationships, which often allow them to defer associated expenses until a transaction is closed.
Business owners benefit from this community in the following ways:
Business Continuity – Search Funds will typically look to invest in middle market companies generating adequate cash to fund future growth through internal cash and debt. The expectation is that the entrepreneur will work with the existing management team to successfully grow the business post transaction. This represents an attractive alternative to strategic and traditional private equity buyers, who often look to tuck the company into a larger entity and then downsize the headcount and infrastructure.
Experienced Board of Directors – Many middle-market business owners do not enjoy the benefit of an experienced Board of Directors. Once the company is acquired, a Board of Directors made up of experienced investors and operators will be formed in order to ensure that the company is responsibly governed.
Longer Term Investment – Investors in the business will ultimately expect a liquidity event. However, the average hold period for search fund deals is seven years, and the most successful search fund deals have been held for over ten years. For business owners, this further reinforces the Search Fund community’s commitment to responsible, long-term investment management.
Co-Investment Opportunity – Many business owners will elect to “roll” equity into the transaction, thereby allowing them to benefit from the value that the Search Fund community adds post transaction. This often translates to meaningful financial upside to business owners.