What is a Search Fund?

“A search fund is essentially a vehicle for entrepreneurship through acquisition,” described Rob Cherun, Managing Partner at SME investment firm Auxo Management. “In the first stage, a small group of investors back operating managers to search for a target company to acquire. For that backing, they get to invest pro rata into the target company when we find it. Then in the second stage, we find the company and we buy it with our investors’ money, and we take an operating role in the acquired company.”

Stanford’s Search Fund Primer typically denotes four major phases of ETA through the search fund:

• searching for the business
• acquiring the business
• managing the business
• and exiting the business

Searching for the business is like dating, in that entrepreneurs are trying to get to know sellers as much as sellers are wanting to get to know the entrepreneurs. Searchers, or entrepreneurs looking for companies, spend on average nineteen months to successfully find and acquire a company, but sometimes it takes as long as 2.5 years.

In their time searching for companies, searchers still need compensation. So, they choose to either raise capital from investors to search or draw from their savings. Both options have their advantages and disadvantages, which will be discussed in greater detail in part 3 of this book.

Acquiring the business is like marriage because once the transaction is settled there’s no going back. Acquisition deals take anywhere from three to six months, during which time entrepreneurs negotiate with sellers to reach a fair price indicative of the company’s profitability relative to the market.

Most times entrepreneurs won’t have the financial capability to buyout a business on their own. To raise enough capital to buy a business, entrepreneurs can approach banks for loans, approach investors for equity, and even request financing from sellers. All in all, numerous different combinations of financing solutions are available for entrepreneurs to pursue ETA.

Managing the business is really where the managerial and investing skills of entrepreneurs get put to the test. Unlike sellers, who may have held on to the business to receive steady income, entrepreneurs are trying to grow the business as much as possible to generate capital gains for themselves and their investors.

As a result, they invest a significant portion of the company’s profits back into the company with new projects. Examples include creating new product and service lines, marketing more widely, acquiring competitors, or divesting lagging business segments.

“The individuals who choose to do this want to build a company, and building a company takes time,” noted Coley Andrews, co-founder of search fund investment firm Pacific Lake Partners. Some search fund acquisitions have been active for more than seven years.

Exiting the business is quite an achievement. After three to seven years of operations, an entrepreneur can sell the business to either private equity firms (financial buyers) or other companies (strategic buyers). Although recently, many entrepreneurs through acquisition have chosen to retain management of their business by recapitalizing with new investors, like growth equity firms. These entrepreneurs, above all else, value the opportunity to lead that is provided by the ETA model.

To find out how individual people like you and I can raise search funds, be sure to read my book Acquiring Entrepreneurship!

Acquiring Entrepreneurship: Buying and Operating Small Business for Growth launched on April 13, 2019! You can find the E-book version here.

If you want to connect, you can reach me here via email ar6cr@virginia.eduor connect with me on social: LinkedIn or Facebook.