Search Funds: How Smart Founders Secretly Launch Companies

Making Billions: The Private Equity Podcast for Fund Managers, Startup Founders, and Venture Capital Investors

26 Feb 202427:23

Summary

TLDRThe podcast host Ryan interviews Carl, an M&A expert, about search funds - a method for entrepreneurs to acquire existing companies instead of building from scratch. Carl explains the search fund model, including equity structures aligning incentives between investors and operators. He outlines best practices like extensive research and community outreach to set up a search fund for success. Carl discusses global search fund market trends and maturity levels, noting big opportunities as baby boomer business owners near retirement with no succession plans. He advises ambitious professionals to explore buying a business, knowing their goals and focusing their search.

Takeaways

😀 The show covers strategies for raising money, launching businesses, and achieving success
👨‍💼 Carl Lundberg is a CEO specialized in acquisitions, search funds, and management buy-ins
💰 Search funds help entrepreneurs buy companies by raising capital during the search period
⚖️ Equity incentives align stakeholders, but failing to do searches properly can cause losing deals
🔍 Self-funded searchers use personal capital vs. traditional searchers who raise external funds
🤝 Win-win deals meet seller succession needs and provide growth potential for searchers
🚀 The US search fund ecosystem leads globally but the UK market has strong opportunities
📈 Baby boomer business owners nearing retirement spur demand for entrepreneurial buyers
🔎 Industry knowledge, strategy and preparation increase likelihood of search fund success
🌎 The search community holds conferences and events for broader awareness and support

Q & A

What is a search fund?
-A search fund is where an entrepreneur or group of entrepreneurs raise money to fund the search process to find and acquire a business to run. There are traditional search funds where the money is raised from investors, and self-funded searchers who fund the search themselves.
How much money is typically raised for a traditional search fund?
-Between $300,000 and $600,000 is typically raised to cover costs like the entrepreneur's salary, software, travel, and due diligence during the search period.
What return do search fund investors typically target?
-Search fund investors typically target a 35% IRR. They get a 50% uplift on their search capital when a deal is made, preferred shares with 8-12% dividend in the acquired company, and the majority of the common equity.
What equity does the search fund entrepreneur usually get?
-The searcher usually gets 8-10% of the common equity upfront, another 8-10% that vests over time if they stay in a management role, and another 8-10% that vests based on IRR targets being hit between 20-35%.
How can searchers avoid losing in the early days?
-Getting advice from experienced search fund investors, sticking to objective criteria instead of emotional attachment, and being willing to walk away from bad deals early instead of falling prey to sunk cost fallacy.
How does the search fund market differ geographically?
-The US market is 10-15 years ahead in maturity compared to Europe. Government programs, business schools, and investor understanding make search funds more common in the US. Europe is growing fast though, especially Spain.
Why is there a good opportunity for search funds in the UK?
-There are many profitable small businesses run by baby boomer founders approaching retirement age that could benefit from new operators and succession planning through a search fund acquisition.
What experience helps search fund entrepreneurs be successful?
-Having experience in the industry of the acquired company helps build trust and credibility with selling founders to nurture the business. Operational experience also helps improve the business.
What financial metrics should searchers look for in targets?
-10-30% EBITDA margins, high correlation between revenue and EBITDA showing operational leverage, stable cash flows.
What resources exist for learning more about search funds?
-The Search Investment Group self-funded searcher study, the International Search Fund Centre conferences, and the Entrepreneurship Through Acquisition awards in London.