BUYING A BUSINESS "MODEL"
START HERE: Is buying a small business right for me?
Search Funds broadly are vehicles for entrepreneurs to raise funds from investors interested in making private equity investments [In many instances referred to as "Fundless Sponsors" or "Unfunded Buyers" since acquisition equity & debt capital is indicated but not firmly committed].
- In the first stage of a "classic" or "traditional" search, a small group of qualified investors back solo or partnered operating manager(s) to search for a target company to acquire. A fund generally has up to 2 years and may find a target acquisition company [GSB: 75% acquire]. Investors are able to invest a pro-rata share in the target company, subject to their individual liking. Many entrepreneurs deviate from the "classic" model by (1) teaming up with a single investor group or (2) by self-funding the search stage & approaching various investors when a target company is identified to acquire. More on the Self-Funded search process.
- In the second stage, the operating manager(s) of the Search Fund take operating roles in the acquired company—CEO, President and the like.
For more details, please see our list of relevant resources.
Search funds typically target companies in the $5-30m price range, $1-5m EBITDA range, $2-30m revenue range, requiring $2-10m of equity capital, in (1) fragmented industries, with (2) sustainable market positions, (3) historically stable cash flows, and (4) long-term opportunities for growth and improvement. Service and light manufacturing companies outside high tech industries are popular targets. Often these companies are under-managed prior to the acquisition.
Many are started by entrepreneurs with limited operational experience and possibly no direct experience in the target industry. The goal of the investor is to place promising, motivated managers in an environment with a high probability for success given the oversight and experience of the investors themselves.
There are currently over 241 entrepreneurs actively seeking to acquire companies around the world and across nearly all industries. In 2022, over 50 new search funds were formed
Many of these individuals come from HBS, Stanford GSB, Chicago Booth, Columbia and UPenn Wharton with on average 7 years of work experience. With the help of their investors, they are prepared to search, acquire, operate and strengthen a small business legacy. In context to the greater economy, small businesses are a vital component and often account for more than 50% of both GDP growth and job creation in many countries (SBE Council).
Search Fund Investors
Search fund equity investors typically consist of high net worth individuals, private equity firms as well as family offices. Over the past 10 years, 75% of search fund investment capital has come from the top 25% of investors. There are some regulatory compliance complications with those that are actively employed in public financial markets, so many investors tend to be private market direct investors or indirectly through small institutional fund managers. In many instances, search phase and acquisition capital can be self-funded by the entrepreneur in order to obtain more favorable ownership economics. Below is a list of several search fund investor platforms. For additional inquiries, please email email@example.com
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Perhaps the most common and fastest growing path to owning a small company.
Capability, Capital & Commitment
In this informal model, entrepreneurs take on the costs and risk of searching for a company to buy. This enables the entrepreneur to keep a larger part of the ownership upon finding a company to acquire (Often retaining 50-100% of the ownership of the company). These entrepreneurs forego the need for a large pool of investor/mentors and rely on personal experience, capability and informal mentorship in their search, closing and operating decisions. This approach is much less standardized and the investor base is less conforming than "classic" search fund investors. Entrepreneurs generally buy smaller companies ($500k to $2.5m EBITDA) and finance their acquisition with personal equity (0-30%), investor equity (10-35%), seller note (10-35%) and senior bank debt (30-60%). There is a growing number of benchmarks for these type of EtA opportunities, yet no strong central resource for data. For more information about this model, please reach out: firstname.lastname@example.org
Email email@example.com with any Search Funds related news or announcements.February 21, 2024In response to the growing interest in Entrepreneurship Through Acquisition (ETA), the Polsky...
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Deal Platfoms: Equire.co & MergerNetwork