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”

  2. I am curious to find out what blog platform you have been working
    with? I’m having some small security problems with my latest website and
    I would like to find something more risk-free. Do you have any recommendations?

  4. You could certainly see your enthusiasm within the article
    you write. The arena hopes for more passionate writers like you who are not
    afraid to say how they believe. At all times follow
    your heart.

  6. wonderful submit, very informative. I ponder why the other experts of this
    sector do not realize this. You should proceed your
    writing. I’m sure, you have a huge readers’ base
    already!

  7. hello there and thank you for your information –
    I have certainly picked up anything new from right here.

    I did however expertise several technical points using this website, as I experienced to reload the web site lots of times previous to I could get it to
    load properly. I had been wondering if your hosting is
    OK? Not that I’m complaining, but slow loading instances times will sometimes affect your
    placement in google and can damage your high-quality score
    if advertising and marketing with Adwords. Well I’m adding this
    RSS to my email and can look out for much more of your respective interesting content.
    Ensure that you update this again soon. puzjoy fridge stickers sticker single door factory

  9. Hi there, I believe your site might be having internet browser compatibility issues.
    Whenever I look at your web site in Safari, it looks fine however, if opening
    in I.E., it’s got some overlapping issues. I merely
    wanted to give you a quick heads up! Other than that, great site!

  10. With havin so much written content do you ever run into any issues of
    plagorism or copyright violation? My blog has a lot of unique content I’ve
    either authored myself or outsourced but it seems a
    lot of it is popping it up all over the web without my
    permission. Do you know any solutions to help
    prevent content from being ripped off? I’d definitely
    appreciate it.

  11. That is very fascinating, You are an excessively professional blogger.
    I have joined your rss feed and look forward to
    seeking extra of your fantastic post. Additionally, I have
    shared your site in my social networks

  13. Pingback: where to purchase ivermectin

  17. Nice post. I was checking constantly this blog and I am impressed!
    Extremely useful info specifically the last part :
    ) I care for such information much. I was seeking this
    certain information for a very long time. Thank you
    and good luck.

  18. I loved as much as you’ll receive carried out right here.
    The sketch is tasteful, your authored material stylish.
    nonetheless, you command get got an impatience over that you
    wish be delivering the following. unwell unquestionably come
    more formerly again since exactly the same nearly very often inside case
    you shield this hike.

  20. Unquestionably believe that which you said. Your favorite justification seemed
    to be on the internet the simplest thing to be aware of.
    I say to you, I definitely get annoyed while people think about worries that they
    plainly don’t know about. You managed to hit the nail upon the top as well as defined out the whole thing without having side
    effect , people could take a signal. Will likely be back to get more.
    Thanks

  21. After I originally left a comment I appear to have
    clicked the -Notify me when new comments are added- checkbox and now each time a comment
    is added I receive four emails with the same comment.

    There has to be a means you can remove me from that service?

    Thank you!

  23. What’s Happening i am new to this, I stumbled upon this I have found It absolutely useful and it has aided me out loads.

    I’m hoping to contribute & aid other customers like its aided me.
    Great job.

  25. Thank you for sharing your info. I really appreciate
    your efforts and I am waiting for your next write ups thank you once again.

  26. Having read this I thought it was really informative.
    I appreciate you taking the time and effort to put this article together.
    I once again find myself spending way too much time both
    reading and leaving comments. But so what, it was still worthwhile!

  29. Nice post. I learn something totally new and challenging on sites I stumbleupon every day.
    It’s always exciting to read through content from other writers and use a little something from their web sites.

  30. I’m impressed, I must say. Rarely do I come
    across a blog that’s both equally educative and entertaining, and without a doubt, you have hit the nail on the head.
    The problem is something not enough folks are speaking intelligently
    about. I am very happy I stumbled across this during my search for something concerning this.

  33. Good post. I learn something totally new and challenging
    on blogs I stumbleupon on a daily basis. It will always be useful to read through articles from other writers and
    practice something from their websites.

  34. Tremendous issues һere. I am very glad t᧐ see your article.
    Thank ｙou so much and I am taкing a looқ forward to
    touch уoս. Ԝill you pleаse drop me a mail?

  38. I am glad that I found this page, because I found here all the information I need. I keep my fingers crossed for further development. Good luck!

  40. I am glad that I found this page, because I found here all the information I need. I keep my fingers crossed for further development. Good luck!

  43. I am glad that I found this page, because I found here all the information I need. I keep my fingers crossed for further development. Good luck!

  45. I am glad that I found this page, because I found here all the information I need. I keep my fingers crossed for further development. Good luck!

  47. I am glad that I found this page, because I found here all the information I need. I keep my fingers crossed for further development. Good luck!

  48. Every weekend i used tto pay a quick visit this website,
    as i want enjoyment, as this this site conations
    truly pleasant funny information too.

  49. Amazing article, really I loved everything I found here. Keep doing such a wonderful job and I will be visiting here very often.

  50. I love what you guys are up too. This kind of clever work and reporting!
    Keep up the amazing works guys I’ve added you guys to my own blogroll.

Comments are closed.