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Taking a Second Look: How My View of Search Funds Changed

By Kevin Dempsey, CBI, CMEA

Takeaway: Several reasons you may want to (re)consider working with a Search Fund:

Over the past five years we have been getting more calls from a special set of buyers known as Search Funds. About three years ago, after working very hard through due diligence and MBA level discovery, and three unsuccessful deals, we gave up on Search Funds as a buyer source. The experience of working with graduate students, their alma mater programs, the MBA-entrepreneur/owner was very disappointing. As you might imagine, our Sellers were also very disappointed by the experience and even projected their frustration on me. After three unsuccessful attempts with Search Funds, I decided to avoid them.

At the M&A Source Spring 2018 Conference I decided to participate in a workshop about Search Funds. I was very impressed and encouraged by what I learned. Apparently, Search Funds have really come along over the years. Searchers for businesses known as ETA’s (Entrepreneurship Through Acquisition) are actively pursuing and closing on deals. Numerous Ivy League schools like Stanford, Harvard, Chicago and Columbia are now educating graduate business students in entrepreneurship with curriculum that teaches them how to buy and run companies. The University of Chicago and Northwestern have even teamed up for an ETA Conference this fall.

Thinking through my experiences and what I learned at the recent M&A Source Conference, I realized I’d better take a closer look at this option for finding a buyer. Here are some of the reasons I am again, open to working with a Search Fund:

  1. They have funding. Some have SBA funding approval (for example, Live Oak Bank) which involves the loan officer checking their sources of funding and collateral.  Others are funded by family and/or PEGs.
  2. They are motivated buyers. They actually hope to operate the business, even replace the present owner.
  3. You can find hundreds on The website will also allow banner ads for reasonable prices.
  4. They are educated. Educated buyers who understand the Buy/Sell process are easier to work with throughout the deal making stages.
  5. They seek smaller companies. As opposed to most PEG Search Funds will often look at and buy companies under $1 million in EBITDA.

As a rule, our firm usually avoids smaller companies below $1 million EBITDA. Now that we have a potential source for qualified buyers in a Search Fund, we may be able to market these Sellers to Searchers before we turn them away.

As with any new option, there are some pitfalls, unless you know what questions to ask.

  • You still may need to do screening of the Searchers and Search Fund to understand ‘fit.’
  • You need to make sure they are active (and funded).  Most Searchers have funding for three years to find a company.  Determining how long the Searchers have been looking provides that insight.
  • The timing of the funds is also important. Ask if they are funded or does the funding come after they find a company?  That may mean, even if they want to buy, someone else is making the decision.
  • Ask if they are approved by an SBA bank.  This means more cash to the Seller and they have already gone through some financial and business plan scrutiny. (See companion article from Heather Endresen with Live Oak Bank)
  • Ask if they are only looking for companies near where they live, or are they willing to relocate?

M&A Source is planning to add a Searcher Expo on Wednesday afternoon following lunch after the PEG Expo. We will be announcing this event soon, but plan on staying after the PEG Expo and make sure you bring teasers of the companies you represent in the $1 million± EBITDA range.

What others are saying:

Gary Rogers of The Kingsley Group and Chair of our PEG Expo says, “The Search fund community represents a new and virtually untapped opportunity to us as M&A M&A advisors…We need to adapt our marketing techniques to match with their search methods.”

Laura Ward of Kingsbridge Capital Partners and our incoming Chair says, “These well-educated and skilled entrepreneurial buyers will potentially help our members fill a void for those deals that are too large for a main street buyer and too small for private equity groups.”

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