Search funds are groups of private individuals who raise capital to invest in businesses, usually over the short or medium term. The model is similar to private equity firms, except that search funds do not operate the businesses they invest in. Their goal is to fund companies with significant growth potential, not to manage them. These funds have overtaken the lower middle market, and if you’re considering selling a business in the next year or two, odds are good that at least some of your suitors will be search funds. Many business brokers and other experts in the world of lower middle market M&A will tell you that these funds tend to initially tender low-ball offers. But as with most things in the world of business sale transaction things are rarely black and white. A search fund could be your best sales opportunity, or your worst.
Here are some benefits to consider before you reject all offers from search funds without further negotiation.
Search funds are a favored vehicle for young investors and new MBA graduates. The pool of investors is often very similar to that of a private equity firm. These are not unstable operations overseen by people who do not have extensive experience. They’re quite stable, and often gain the backing of some of the industry’s most respected firms and individuals.
A successful search fund investment can be incredibly lucrative. This means they attract some of the most talented investors. Notably, this also includes new investors who may bring new ideas and a deep commitment to a transaction process. Notably, this also includes new investors who may bring new ideas and a deep commitment to acquire a company. Search fund investors know that company acquisitions can increase returns to their portfolio and they’re willing to invest capital to obtain that goal. When you work with a search fund you’re are typically working with a slate of quality investors who might not have otherwise been interested in your business.
Search fund investors include a team of skilled entrepreneurs who hope to run the company. As such, they’re closer to the business and will work more closely with you during the lead up to closing. This offers significant flexibility. For example, if you want to stay on for a time or want to ensure some of your management team remains in place you may be able to negotiate for this. You’ll also leave with the assurance that someone highly competent is running your company and likely will be helping it to grow.
If you want to exit your business, not just sell it, a search fund can expand your options and expedite your path out. If your business is struggling and you don’t have the energy to get it back on track a search fund may be a key ingredient in the recipe for success. The prices are sometimes low but not always. When you can align with a reputable search fund the sale can be a win-win to both parties.
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