What Makes a Business Suitable for Search Fund Acquisitions?

In a world of numerous great small businesses, a few stand out as excellent candidates for search fund acquisitions.

What Makes a Business Suitable for Search Fund Acquisitions?
Article by
GTE Staff Writer
Article Date
August 22, 2022

In the world of acquisitions, there are many private businesses that can be classified as “great businesses.” Within this realm, there is a subset of businesses that are particularly suitable for acquisition via a search fund vehicle. In this article, we go over characteristics that search fund entrepreneurs should look for when searching for businesses to acquire.

  1. Business already generates free cash flow

Search fund entrepreneurs should pursue a great business to run rather than try to fix a broken one, even if it is selling at a significant discount to the former. This is because search fund operators typically lack the managerial experience of a seasoned C-suite executive, and therefore need a greater margin for error. A great business gives operators time to learn the business, while a subpar business demands perfect guidance from the start of the operator’s tenure.  

  1. Business is not currently in a transition stage

Within the life cycle of a company, it is typical for the firm to go through many stages of transformation and reinvention. However, when looking to be acquired, a private business should not be undergoing a major transformation. This is because a business at this stage is usually more vulnerable to attack from competitors, and therefore typically requires veteran managers who already understand the business well. Furthermore, owners looking to sell in the middle of a “transition” may be trying to jump ship at an opportunistic time. This brings us to the third point. 

  1. Owner’s reason for selling is extrinsic to the business

In every transaction, the buyer’s motivation is clear: to make money. The seller’s motivation is less clear, however. The seller may be selling because he/she believes their business’s fundamentals have deteriorated, and they can get the best price for it if they sell now. Search fund entrepreneurs must be very careful to not buy into these types of businesses. An owner may also be trying to sell because he/she is looking to retire. This is an extrinsic reason because it has nothing to do with the inherent quality of the business. Search fund entrepreneurs should take advantage of these opportunities when presented to them.