A SEARCH FUND, WHAT'S THAT?
We have been fortunate enough to work with different types of investors and founders. We are proud to say that being exposed to diverse industries and businesses has been and will continue to remain an amazing experience. We love what we do and strive to exceed expectations. One thing we noticed is that many times CEOs and founders are not familiar with the term “search fund”, therefore we have decided to share some basic information on this interesting investment vehicle.
A search fund is an investment vehicle where a single - most of the time – young entrepreneur is backed by institutional investors, high-net worth individuals, university endowments, or insurance companies in order to acquire a target company. The main goal is to locate, acquire, manage, and grow ONE privately held company. Unlike, traditional private equity funds, search funds hold their acquisitions for 6+ years.
Following are the typical stages of a search fund cycle:
- Stage A: The aspiring entrepreneur raises initial capital for salaries (usually small), traveling, marketing, and admin/operations expenses. Once the young entrepreneur receives his initial capital, he begins his search, identifies and screens potential targets, and reaches out to founders.
- Stage B: At this point the entrepreneur focuses on deal origination, screening targets, and attending meetings. Let's assume that after hundreds of calls and meetings, the entrepreneur finds the perfect target, what's next? From here he would assess the seller’s interest, evaluate the target company, and initiate the due-diligence. Once the due-diligence is satisfactory, the entrepreneur negotiates the terms of the deal with the current CEO and his advisors. When all parties agree to the terms, the future CEO goes and raises the remaining capital needed to close the deal.
- Stage C: During the acquisition is process, the entrepreneur recruits his board of directors, which is comprised of trusted advisers and investors in the search fund. Once the company is acquired, a transition period - 8-12 months - is expected. The retiring CEO trains, mentors, and teaches the young entrepreneurs with ins and outs of the company and industry. As soon as the transition period expires, the young CEO takes full control of the company. His investors expect changes, improvements, innovations, and continuous growth.
- Stage D: A typical search fund entrepreneur spends between 6-10 years within the acquired company. When the holding milestone is reached, the investors recommend an exit or liquidity. The entrepreneur may sell the company, buy the investors out etc…
This investment vehicle has been growing in popularity amongst young graduates from elite institutions. It is also an inexpensive way to eliminate the typical 2% invesment management fee.
Our principals have previously worked with search funds on potential acquisitions ranging from $3M to $20M. Envol Capital is well acquainted with this business model and search funders accross the United States.
If you find this business model to be aligned with your succession plan, or if you would like to get more details on this investment vehicle, feel free to contact us by clicking HERE