![\"Buying](\"https:\/\/masonmyers.com\/wp-content\/uploads\/2012\/09\/canstockphoto5981912.jpg\" "\\"Buying")
<\/a>Last week I had a nice conversation with a mid-career person looking to buy a business.\u00a0 He was contemplating using the “search fund” model to find and buy a business.\u00a0 As a brief background, a search fund is a model where an entrepreneur raises a pool of capital from investors to cover expenses during their search for an attractive business to buy.\u00a0 Once a business is identified, the investors have an option, not a commitment, to invest and they get some additional preferences for having funded the search.\u00a0 For business owners looking to sell, search funds may be an option for you, particularly if you want to exit the business and bring in a new management team.\u00a0 Most of the time, the entrepreneurs running the search want to manage the business post acquisition.\u00a0 When I bought the National Holistic Institute coming out of business school, I did not use a search fund — I did what is called an “unfunded search” or basically I paid for the search expenses myself.\u00a0 I also had a business school friend and classmate use the unfunded search model.<\/p>\nFunded Business Search Pros:<\/h3>\n
Our conversations were about whether to do the “funded search” or “unfunded search”.\u00a0 Here are some of the observations that we discussed.\u00a0 First, the pros of a search fund…<\/p>\n
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- Money to pay the bills while searching<\/strong>.\u00a0 For some, this is essential.<\/li>\n
- Well-established group of investors<\/strong> in search funds that have experience and success with the model.\u00a0 You will not have to reinvent the wheel.<\/li>\n
- Experience, advice, and guidance.<\/strong>\u00a0 This is key.\u00a0 It isn’t easy to find a business, separate the good from the bad, strike a fair deal, not miss anything in diligence, and get it closed.\u00a0 Experience and guidance at key moments helps a lot.\u00a0 The search fund investors that I know best are the Search Fund Partners in Palo Alto<\/a>.\u00a0 They are quality guys, they are wise investors, and they would be a great help to anyone searching for a business to buy.<\/li>\n
- More certainty of closing because financing is more firm.<\/strong>\u00a0 Because the investors are already lined up, it is usually much easier to close a deal once you have found the business.\u00a0 In an unfunded search, it may be a scramble to line-up the financing although good deals have a way of finding capital and getting done.<\/li>\n<\/ul>\n
Funded Business Search Cons:<\/h3>\n
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- Can limit the universe of potential targets.<\/strong>\u00a0 Because search fund investors need businesses of a certain size or growth rate, it may limit the businesses you may target somewhat.<\/li>\n
- Will need to sell the business.<\/strong>\u00a0 Search fund investors will expect a return of their capital in 5-10 years.\u00a0 If you want to own your business for a longer term time horizon, you may be somewhat misaligned with search fund investors.\u00a0 Sometimes, there are huge success stories of companies found through a search fund, such as Assurian, that have been successful recapitalizing the business several times to return capital to investors.<\/li>\n
- May not be able to utilize some funding sources, like SBA loans.<\/strong>\u00a0 This may not matter to you, but having investors will mean certain types of financing will not be available such as SBA loans that require personal guarantees from most owners which search fund investors will not be willing to do.<\/li>\n
- Financial model works best if you can fund it yourself<\/strong>.\u00a0 Without investors, your financial returns for yourself will likely be better has researched by Richard Ruback of the Harvard Business School in his research on the market for smaller firms.<\/li>\n<\/ul>\n
Most often, people will choose a funded search because the pros outweigh the cons.\u00a0 That is probably a good choice.\u00a0 If you do have the option to fund the search yourself, it is worth exploring as it worked for me and a couple of other people that I know.<\/p>\n
<\/p>\n
- Will need to sell the business.<\/strong>\u00a0 Search fund investors will expect a return of their capital in 5-10 years.\u00a0 If you want to own your business for a longer term time horizon, you may be somewhat misaligned with search fund investors.\u00a0 Sometimes, there are huge success stories of companies found through a search fund, such as Assurian, that have been successful recapitalizing the business several times to return capital to investors.<\/li>\n
- Well-established group of investors<\/strong> in search funds that have experience and success with the model.\u00a0 You will not have to reinvent the wheel.<\/li>\n