Rise of the New Buyer: Exploring Search Funds
Search funds are a unique type of investment where individuals aim to buy and manage just one company. This approach is different from traditional private equity firms that usually invest in multiple businesses. The growing popularity of search funds is changing the business world, offering new possibilities and challenges for owners thinking about selling their companies. This article breaks down what search funds are, how they compete in the market, and what business owners should think about when dealing with these buyers. Understanding search funds can help sellers make smarter choices and find the right person to continue growing their business post-sale.
In the fast-changing M&A landscape, search funds have become increasingly popular. Unlike traditional private equity firms, search funds have an uncommon approach and structure.
What Are Search Funds?
Search funds are set up by individuals, usually with a background in business or finance, who want to buy and run just one company. It's like forming a team where each member pools their money to purchase a business. Unlike more traditional financial buyers, like private equity firms that invest in many companies, search funds focus on finding and managing a single company. The people who start these funds gather a group of investors to fund the deal process. However, it's important to know that the actual money for buying the company isn't fully committed until they are almost ready to close the deal.
Key Highlights About Search Funds
Individual-Driven Approach: Search funds are led by individuals, often first-time buyers called "searchers." Each searcher brings their own unique experiences to the business, making every search fund distinct. For sellers, this means it's vital to carefully evaluate the searcher’s skills and how well they match up with the business.
Investor Backing with No Guaranteed Funding: When dealing with search funds, keep in mind that they might have investors lined up, but the money isn't immediately on hand. If you're selling to them, make sure they have solid backing from their investors and a clear strategy to access the funds needed to complete the purchase.
Operational and Leadership Expertise: Many people who run search funds have managed a business before. This is good for sellers who want to make sure their company is left in capable hands.
Competitive Landscape: Search funds are in a busy market where they compete with groups like private equity firms. This competition can help sellers get a higher price for their business. But search funds need to be quick and thorough in checking out businesses to stand out to you and your advisors.
Unique Due Diligence Process: The due diligence process with search funds can be different from doing so with more traditional buyers. Since search funds often involve first-time buyers, they might be more detailed or use unusual methods. Sellers should be ready for a different kind of experience and make sure they have the right help and advice to handle it well.
Key Considerations for Sellers
When a search fund shows interest in buying your business, you should take a few careful steps:
Vet the Buyer: Learn about the buyer's background, their experience, and the details of their financial support.
Get a Strong NDA: Make sure there is a non-disclosure agreement in place to keep your business's private information safe.
Review the Letter of Intent Carefully: Before agreeing to anything, look closely at the letter of intent. Understand how search funds work differently and get advice to make sure the terms are good and make sense.
Search funds are becoming a bigger part of the business buying world. They bring new opportunities but also unique challenges and risks. By knowing what search funds are all about and being cautious, business owners can make smart choices and possibly find the right person to take their company forward.
