The Middle Market Review Insights on the Middle Market.

Subscribe Subscribe

Subscribe Today

I want to receive:

Thanks for subscribing!

Search Fund Deal Sourcing

5 Strategies for Successfully Managing a Search Fund

Pankaj Amin founded SC Ventures as a search fund in 2001 and bought Affinitel Communications, a telecommunications company he subsequently ran for seven years. SC Ventures currently has professionals in New York and Chicago and serves private equity firms as operating executives. Pankaj has a BS from Princeton University and an MBA from the Harvard Business School.

Typically, a search fund is comprised of between one and three individuals or executives who seek to buy and then personally operate a business. Discipline and proper management of the fund is critical to maintaining the support of your investors, generate relevant deal flow, and see a transaction through closing.

Understanding some of the key strategies for successfully managing a search fund can greatly improve your success rate.

Communicate regularly to investors and advisors

Most search funds are funded by individuals and angels who understand the value proposition of conducting a search fund. Many of these investors have either bought and owned businesses themselves or operated businesses that grew through acquisition. A key factor in successfully managing a search fund is regular communication with your investors and advisory team. These professionals have a key interest in the success of the search fund but will need specific direction regarding the focus of the search in order to marshal contacts and resources to the search fund effectively.

Use a monthly newsletter to advisors and a series of one-on-one investor calls to communicate with as broad a network as possible regarding the fund’s activities. While this may seem obvious, it is one of the first things that loses consistency with the ups and downs of deals that may be investigated. Therefore, maintaining regular communication is key.

Demonstrate your ability to close on a deal and operate a business

One of the most significant challenges for a search fund is establishing credibility with counterparties in the transaction process. Specifically, bankers and brokers will invariably be skeptical of the search fund’s ability to close on a deal. Moreover, company owners may have reservations about the search fund operator’s management and operational experience, especially if the deal terms ask for a seller’s note or performance-based payout.

When I was early on in searching for my first business, I was asked about my ability to run an operation. I mentioned my management consulting background and MBA. This received a chuckle. Nevertheless, many business owners will see an honest desire to run a business and an intuitive and decisive mind as a benefit over someone with many years of experience and a hesitance to roll up their sleeves; therefore, there are many ways to position your background to establish credibility.

Be specific about your target acquisitions

No one is spending more time searching for your business than your firm. Therefore, being specific about your ideal target is critical [read more research on why specialization matters]. It builds a bridge to the many people in your network that may know about a company that fits your criteria. Therefore, write down the target size, geographic range, industry focus, and customer composition of your target business to distribute, either by email or through Axial. This will allow you to communicate efficiently with your network.

One search fund I advised was frustrated with his lack of deal flow. When I mentioned this seemingly basic tactic, he replied that he did not want to lose potential deals by establishing criteria. However, a lack of criteria in fact gets you nothing as your network will not expend the effort to pull your criteria out of you. If a deal in New York surfaces and you want to live in Texas, it doesn’t matter if it comes across your desk or not. It isn’t the right one for you. By being specific about your interest, you increase the likelihood of getting what you seek.

Find out why so many investment firms have joined the Axial network to expand their network, engage more advisors, and source deals faster.

  • Investment banks, business brokers and M&A advisors use the Axial network for business development, client research, and to connect directly with relevant and qualified buyers. Learn more.
  • Private equity firms and investment professionals use the Axial network to source deals and build relevant relationships. Learn more.
  • CEO’s, CFO’s, and Corporate Development Officers join the Axial network to improve deal sourcing and pipeline management and more successfully discover relevant target companies. Learn more.

Don’t get emotionally attached to any deal

When one finds a business and begins negotiating terms and conducting due diligence, a clear sense of emotional investment in the prospective company ensues. The search fund manager begins imagining his or her plans for the business and revels in the fact that a deal has finally come through. However, transactions fall apart for a number of reasons and at all stages of the process. Therefore, keeping emotions in check is vital. Moreover, intermediaries and bankers will sense this attachment and some of them might use it to negotiate terms or prices to which you wouldn’t agree in a more rational frame of mind. It is important to know your ultimate limit in the negotiation in advance (write it down for yourself if necessary) and not fear the deal falling apart beyond that limit.

Plan conservatively

Managing a search fund is inherently a road into uncertainty. You don’t know when the right deal, the appropriate financing, and the right circumstances will all come together. Therefore, it is important to plan conservatively. Specifically, do not expect that the search process will take 4-6 months when the average search fund timeline is approximately two years to acquisition. If you are not mentally and financially planning for the process to take at least two years, you will be putting yourself into a situation where you will be unnecessarily stressed – and the process has enough stress outside of this. Therefore, set your own expectations and those of your family, investors, and advisors up front.

Similarly, as you search for businesses consider how you can be conservative in your search process as well. For instance, opportunities where you can purchase a business with lower levels of leverage should have some bonus in your scorecard. Few acquisitions have perfect post-transaction execution, so planning a cushion for some trial and error will reduce your personal strain, even though it might also reduce your return calculations a bit as well. In the end, the search fund process is one that fits into your goals for your life; therefore, you should consider how you can plan for the process to support those life goals.

Many people have managed search funds successfully, and countless others have bought businesses and run them. Communicating to different stakeholders effectively, managing one’s mental and emotional state through the process, and properly planning will enable a search fund to increase its likelihood of completing a deal.

Learn More About Joining Axial

Request Information

Subscribe to Middle Market Review

Subscribe to Middle Market Review

Subscribe Today

I want to receive:

Thanks for subscribing!