Search funds are a unique way to finance the acquisition of a small business and have become an increasingly popular model for entrepreneurship through acquisition. When beginning the search process, it is important to understand the intricacies of each phase that goes into the process. Search funds typically operate in six distinct phases: thesis creation, raising capital, searching for a small business, acquiring a small business, and managing a small business.
Thesis Creation: The first phase of search funds is all about creating an investment thesis. This includes articulating why search funds are an attractive investment opportunity, what type of businesses the fund will be looking to acquire, and what the ideal acquisition target looks like. This process also involves putting together a team of experienced professionals who can help execute the strategy.
Raising Capital: The second phase is focused on raising capital from investors. This generally takes the form of a private placement, where the search fund sells equity shares to accredited investors. The size of the fund will vary, but it typically raised between $5 million and $20 million.
Searching for a Small Business: Once the search fund has been established, the focus shifts to finding an attractive acquisition target. This generally involves looking for small businesses that are undervalued and have potential for growth. The search process can be time-consuming and difficult, as there are often many businesses to choose from.
Acquiring a Small Business: Once an attractive target has been found, the next phase is to negotiate and complete the acquisition. This generally involves raising additional capital from investors, negotiating with the seller, and completing due diligence. Once the acquisition is complete, the search fund becomes the new owner of the small business.
Managing a Small Business: The managing phase is focused on growing and managing the small business. This generally involves making operational improvements, implementing growth strategies, and hiring new employees. The goal is to generate strong returns for investors while also creating value for the small business.
Exit: Search funds typically have a 5-7 year time horizon, at which point they will look to exit the investment. This generally occurs through a sale of the business to a strategic buyer or through an initial public offering. The proceeds from the sale are then distributed to investors, who typically receive a return of 2-3 times their original investment.
If you are considering beginning a search on your own, understanding these six phases is crucial to maximizing returns for yourself and your investors. Having a tentative plan for each phase once it is about time to enter can help set up your firm for success.