Posted on by Phil

The Search Fund Model

Search Funds are a misunderstood, and little known asset class that gives young, entrepreneurial, and hungry people the ability to accelerate their careers, ditch working for large corporations, and potentially shape an industry.  I have some experience helping out one of these such investment vehicles, and thought it would be interesting to the masses to shed some light on this relatively unknown asset class.

Definition of a Search Fund

The clinical definition of a search fund is a small group of individuals who have secured a pool of capital in order to buy a company, and then become the senior management team of that company.  For example, two guys out of Harvard Business School decide to forgo their offers at McKinsey, raise $10 million, and go find a services business in New Jersey that they acquire, and then run.  This is the 10 second spiel on search funds, but there is so much more to it than that.

Essence of a Search Fund

To understand a search fund, it’s important to understand the type of people who get caught up in this type of venture.  The typical searcher, if there is one, has a few years of investing experience (PE/VC), and most likely some sort of operational experience either as a consultant or as an actual manager in a corporation.  They probably went to either Harvard of Stanford to get their MBA, and have made the decision to go out on their own instead of joining most of their classmates at Goldman/McKinsey/etc.

They have found a group of investors, typically 10-30 high net worth individuals who were former entrepreneurs, private equity investors, or searchers themselves, to give them a commitment.  The investors commit to investing in a deal, if they like it, and also provide some operating capital for office space, internet, etc while the two entrepreneurs search for a suitable target.

Searchers usually work in groups of 2 as the job takes a lot of resilience and discipline – and going it alone can be, well, lonely.  Between the two searchers, you’re looking at a few hundred thousand dollars in forfeited yearly income while they try to find a company that they could grow into an enterprise that would return considerably more than that.

In exchange for giving up the relatively cushy life at a larger firm, the searchers typically rent out a small room in a shared workspace in New York, Boston, or San Francisco.

Most of the time their day to day consists of hustling to find interesting investment opportunities.  They cold call family businesses in Iowa, talk to business brokers, and try to find industry experts through LinkedIn that will give them free advice on tackling a “niche.”

The Niche Philosophy

Searches are industry driven.  The goal is to find a nascent, but growing industry “niche” that is also target rich.  If your radiologist tells you that he just started outsourcing his billing to a company with a call center in Florida, you might want to look into outsourced billing for radiologists.  Say the industry is growing at 30% and is populated by unprofessionalized, small and sleepy companies.  Well, you just found a great niche.

In practice, searchers go through niches quite quickly.  Time is their most scarce resource and so if something isn’t growing fast, is dominated by a large player, or there just don’t seem to be any companies looking to sell, it’s killed.  Sometimes niches are killed after a few days, sometimes after a few weeks.  The typical searcher is looking at ~3 niches at any given time, while also evaluating more opportunistic targets as they come in through brokers, lawyers, and other networks.

Why Give Up My Job At McKinsey?

Earlier in the post I mentioned that searchers give up a lot of income they could have gotten at another job.  Why would any rational human do such a thing?

For starters, most searchers are entrepreneurial at heart and like working for themselves, so that comes at a premium.  Another key component is that searchers get a decent equity stake in the business that they buy, with their investor base getting the rest (unless current owners are rolling equity, but that is a more advanced topic and a discussion for another day).  The portion of the equity can also be stepped up considerably if IRR targets are hit – these targets are typically around 30%.

Acquisition Profile

Searchers look for many things traditional investors look for in a company: recurring revenue streams, high margins, large markets, etc.  But, there are a few things that are MOST relevant.

  • Growth: Searchers get paid on the growth of the company they buy.  Industry tailwinds are a huge plus.
  • A platform: Search fund investors don’t want their searchers to start companies.  They want them to find “platforms” – defined as firms with all of the infrastructure necessary to scale a business – and then grow said platform.
  • Services/Operationally focused businesses: Most searchers do not have any sort of technology/biotech/other special skill set.  Searchers are hard core operations guys who think about efficiency/hiring/sales/marketing/IT all day long and who can take a family owned, unprofessionalized business, and squeeze out margins while growing the company like crazy.
  • Buying right: Searchers need to find a company they can buy at a rational multiple, and maybe even with the help of some debt and/or seller financing (again, a topic for another day).  They are putting all of their eggs in one investment, and need to make sure they are protected!
  • Management: This is the most important and most misunderstood of the criteria.  Searchers are going to become the CEO/COO/CFO/Whatever and so the current owner either needs to be a manager looking to step down and work on a specific part of the business (sales and marketing, research, etc), or retire/move on altogether.  Of course, finding a high growth company where management wants to walk away at a conservative price is a huge challenge!

The Outcomes

Several very successful companies have sprung out of searchers.  Service Source, Asurion, and other, lesser known companies were all searches to begin with.  Of course, there are also many search funds that don’t make it due to the challenges of finding the right company, at the right price, at the right time.

Please be on the lookout for a follow up post with some of the more advanced and specific details around search funds!  Also, below there is a link to a nice research paper on search funds written by folks at Stanford University.  Enjoy!

Search Funds-2009 Selected Observations FINAL – revised 7.21.10(2)

7,170 Replies to “The Search Fund Model”

  1. I got this site from my pal who informed me regarding this website and at the moment this time
    I am visiting this website and reading very informative posts at
    this time.

  3. First off I would like to say fantastic blog!
    I had a quick question in which I’d like to ask if you do not mind.
    I was curious to find out how you center yourself and clear your mind prior to writing.

    I have had difficulty clearing my thoughts in getting my thoughts out there.
    I truly do enjoy writing but it just seems like the first 10 to 15
    minutes are usually wasted just trying to
    figure out how to begin. Any recommendations or hints?
    Thank you!

  4. Excellent beat ! I would like to apprentice while you amend your site, how could i subscribe for a blog site?

    The account helped me a acceptable deal. I had been tiny bit acquainted
    of this your broadcast offered bright clear concept

  5. It’s really a nice and helpful piece of information. I’m happy that you just shared this helpful information with us.
    Please keep us informed like this. Thank you for sharing.

  6. Wow! This blog looks just like my old one! It’s on a entirely different
    subject but it has pretty much the same page layout and design.
    Wonderful choice of colors!

  7. Hmm is anyone else experiencing problems with the images on this
    blog loading? I’m trying to determine if its a problem on my end
    or if it’s the blog. Any suggestions would be greatly
    appreciated.

  9. Greetings! Very useful advice in this particular article!
    It is the little changes that make the most important changes.
    Thanks for sharing!

  10. Thanks for one’s marvelous posting! I certainly enjoyed reading it,
    you’re a great author. I will always bookmark your blog and will often come back down the
    road. I want to encourage continue your great writing, have a
    nice afternoon!

  11. I do not know whether it’s just me or if everyone else experiencing problems with your blog.
    It looks like some of the text on your content are running off the screen. Can somebody
    else please comment and let me know if this is happening to them as well?
    This might be a problem with my browser because I’ve had this happen previously.
    Appreciate it

  13. I know this website gives quality depending content and other material, is there any other website which presents these kinds of stuff in quality?

  15. You’re so interesting! I don’t think I’ve truly read something like this before.
    So wonderful to find somebody with a few original thoughts on this subject.
    Seriously.. many thanks for starting this up.
    This web site is something that is needed on the internet, someone with a bit of
    originality!

  19. I loved as much as you will receive carried out right here.
    The sketch is tasteful, your authored subject matter stylish.

    nonetheless, you command get got an impatience over
    that you wish be delivering the following. unwell unquestionably
    come further formerly again since exactly the same nearly very often inside
    case you shield this hike.

  22. Can I just say what a relief to discover someone that actually knows what they’re discussing online.
    You certainly realize how to bring an issue to light and make it
    important. A lot more people must read this and understand this
    side of your story. It’s surprising you are not more popular because you certainly have the gift.

  24. I was suggested this blog by my cousin. I am now not sure whether
    or not this submit is written by means of him as nobody
    else understand such certain about my problem.
    You are incredible! Thanks!

  25. When someone writes an post he/she maintains the idea of a user in his/her mind
    that how a user can be aware of it. Thus that’s why this piece of writing is outstdanding.

    Thanks!

  27. I’ve read some excellent stuff here. Certainly worth bookmarking for revisiting.
    I surprise how a lot attempt you set to make this sort
    of fantastic informative website.

  28. Hi, I do think this is a great blog. I stumbledupon it 😉 I am going to return once again since I book-marked it.
    Money and freedom is the greatest way to change, may you be
    rich and continue to help other people.

  29. First off I would like to say fantastic blog!
    I had a quick question which I’d like to ask if you don’t mind.
    I was curious to know how you center yourself and clear
    your thoughts prior to writing. I’ve had a difficult time clearing my thoughts in getting my thoughts out there.
    I truly do take pleasure in writing but it just seems like the first 10 to 15 minutes are usually wasted
    simply just trying to figure out how to begin. Any recommendations
    or hints? Cheers!

  30. Definitely believe that which you stated. Your favorite justification appeared to be on the web
    the simplest thing to be aware of. I say to you, I definitely get annoyed while people consider
    worries that they plainly do not know about.
    You managed to hit the nail upon the top as well as defined out the whole thing without having side effect ,
    people can take a signal. Will probably be back to get more.

    Thanks

  33. Hey very cool website!! Guy .. Beautiful .. Wonderful ..
    I will bookmark your website and take the feeds additionally?
    I am satisfied to seek out a lot of useful information right here
    in the submit, we’d like develop more strategies on this
    regard, thanks for sharing. . . . . .

  34. Link exchange is nothing else however it is simply placing the other person’s
    web site link on your page at suitable place and other
    person will also do similar in favor of you.

  35. Good post. I learn something totally new and challenging on sites
    I stumbleupon on a daily basis. It’s always interesting to read content from
    other authors and practice something from
    their websites.

  36. Hello! I could have sworn I’ve been to this website before but after checking through some of
    the post I realized it’s new to me. Nonetheless, I’m definitely delighted
    I found it and I’ll be bookmarking and checking back frequently!

  38. Howdy! Someone in my Myspace group shared this site with us so I came to look it over.
    I’m definitely enjoying the information. I’m bookmarking and will be tweeting this to
    my followers! Terrific blog and brilliant design.

  40. Hmm is anyone else experiencing problems with the pictures on this blog loading?
    I’m trying to determine if its a problem on my end or if it’s the blog.
    Any feedback would be greatly appreciated.

  41. A fascinating discussion is definitely worth comment.
    I do think that you need to write more about this subject, it may not
    be a taboo subject but usually people do not
    speak about such topics. To the next! All the best!!

  42. Thanks on your marvelous posting! I truly enjoyed reading it, you
    may be a great author.I will be sure to bookmark your blog and definitely
    will come back in the foreseeable future. I want to encourage you to continue your great
    posts, have a nice evening!

  43. If you are going for most excellent contents like myself, only visit this
    web page all the time because it offers feature contents, thanks

  44. Excellent post. I was checking continuously this blog and I am impressed!
    Extremely useful information particularly the last part 🙂 I care for such
    info much. I was seeking this certain information for
    a long time. Thank you and good luck.

  46. Hi, i think that i saw you visited my site so i came to “return the favor”.I am
    trying to find things to improve my website!I suppose its ok to use some of your ideas!!

  49. After looking over a few of the blog posts on your website, I seriously like your way
    of blogging. I book-marked it to my bookmark website list and will be checking back in the near future.
    Take a look at my website as well and let me know what you think.

Comments are closed.