What is a search fund?

what steps search fund process

Reaching a CEO position in a company with more than $5M in revenues is a great career milestone. Usually you need years of experience in a certain industry to get there…

 

…but not always.

 

A search fund is a private equity that aims to acquire one single company. They are usually started by one or two MBA graduates (the “searcher” or “searchers”) to find and acquire a company. Once the company is acquired, the searcher takes over the management of the company becoming the CEO. So it is really “Entrepreneurship Through Acquisition” (ETA) and it mitigates some of the issues that make MBA not choose entrepreneurship.

The process can be simplified as follows:

search fund steps (entrepreneurship through acquisition)

0.- Funding the search (approx. 9 months)

The searcher looks for investors that can support her during the search of the target company. She raises around $0.4M from one or several investors. There are now firms that specialize in search funds so it is becoming easier to find financing. Investors also serve as advisors.

The funds will be used in step 1 but it is important that investors are prepared to engage in the second round of financing (step 2).

So what´s in it for the early investor?

They get a step-up of their initial investment, typically 50%. In other words, for every $100 invested their equity in the search fund is worth $150.

Alternatively, a searcher can self-finance step 1 and seek financing only in step 2.

1.- Performing the search (approx. 20 months)

Probably the most tough to endure, especially for solo searchers. More than a thousand companies are typically identified and checked for fit with the established criteria.

Some of the common criteria for search funds are the following:

  • Revenues between $5M and $25M.
  • EBITDA > $1M
  • Growing industry.
  • Not dependent on technology or not easily disrupted by it.
  • Simple business model.

The firms should operate profitably and the searcher aims to make it grow consistently.

2.- Acquiring the target company

Once the target is identified the searcher starts working to make the transaction happen. She may start this process with several companies and yet not be successful: the price might be too high, the owners put very demanding conditions, the searcher uncovers issues in the detailed due dillingence, etc.

This stage is very sensitive so the searcher needs to act cautiously to avoid issues in the next step.

3.- Managing and growing the acquired company

The searcher becomes the CEO of the acquired company. The transition period needs to be managed closely and may involve shadowing the previous management for some time to ensure a smooth takeover.

Generally, this job is not as technically complex as other typical post-MBA jobs such as consulting or general management in large corporations. Nevertheless, it probably requires a great deal of change management. The searcher needs to get the company in growth-mode (even if it´s a moderate growth) and getting buy-in from employees, suppliers and, especially, customers.

Having managed people before is an experience that can be leveraged in this stage. Besides this, there is no one specific skillset that is neccessary to manage a small company successfully.

4.- Exit

At some point the searcher/CEO may step down to pursue other opportunities. The experience of the search process and the years as CEO are extremely valuable. Some logical exits are serving as CEO in another company or joining a private equity firm. Some of them even start another search fund.

Final thoughts

The success rate is much higher in search funds than in startup although the growth potential is generally lower.

Acquiring a working business puts the searcher directly in a position where she can apply her management style without having to create things from scratch.

There is a lot of information on the search fund model in this site.

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