The Search Fund Model

-Very interesting article recently on Entrepreneur highlighting recent private equity trends and the increasing appetites of family offices for the traditional search fund model. Towards the end of the article, Atta Tarki begins to address an issue that I wish he went more deeply into (hopefully your next article Atta?): The fact that more entrepreneurs who don’t fit the traditional mold of the recently graduated MBA with investment banking or private equity experience are getting into the search fund game.

In the early 2000s, 50 percent of searchers would start their search within a year of graduating from an MBA program, but that number now has dropped down to 25 percent. At the time it was also incredibly rare for searchers to not have gone to business school at all, but 19 percent of searchers now ….. start a search without getting an MBA.

What is Search Fund?

When I first engaged with the search fund model back in 2007, it was still a relatively unknown, inaccessible model. The idea of backing an inexperienced, newly minted MBA to identify, acquire and run one company was insane to most investors outside of a small group of tightly knit investors known as the “search fund mafia.” For the entrepreneur, being limited to such a small pool of tightly knit investors put the aspiring searchers at a very clear disadvantage when it came to negotiating terms, or simply having enough capital out there to back this type of investment for a growing community of aspiring ETA entrepreneurs.

Why Entrepreneurship Through Acquisition?

Family offices, and the explosion of interest in entrepreneurship through acquisition over the past decade, have changed everything, and it’s great to see the pool of investors getting deeper with each passing year as more investors become familiar with the model (and with the returns typically associated with the search fund model).

Something to note here: -One grievance I still have with the general discourse out there when it comes to the discussion of this specific ETA model is that everybody loves to rave about the great returns on investment, but the data referenced is typically for the investors, -not the entrepreneur. I’m not trying to say the search fund model isn’t a great model for the entrepreneur as well as the investor, -it is. But to hit it big as an entrepreneur with the way the search fund investment is typically structured, the search funder more often than not really has to knock it out of the park with the traditional time + performance-based equity model and liquidation rights associated with search fund investments.

For me personally, I ultimately wound up pivoting mid-search away from the typical search fund target in lieu of less proven opportunities and eventually acquired a larger piece of equity in a smaller deal that had had some clear P&L mismanagement leading up to my acquisition. Seven years later, with the help of my investors, we got that company to a point where it was ready for a viable exit.

Final Take on The Search Fund Model

The search fund model presents an amazing opportunity for the motivated entrepreneur, but it can also be a sort of acquisition gateway drug for newly aspiring ETA enthusiasts, ultimately leading to other forms of acquisition entrepreneurship, -like tapping the SBA for up an acquisition loan up to $5 million to buy a small business on your own, and focusing negotiations on seller financing and earnouts, particularly in this new environment. search fund investments

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