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Search Funds: A Financing Option for Business Buyers

Search funds seek out opportunities to acquire.

When Jim Southern wanted to buy a company in the 1980s, he didn't use his savings or look for loans. Instead, he sought investors for a search fund--a pool of money that helps aspiring entrepreneurs find viable businesses to acquire. Southern ultimately purchased a printing company that he held for approximately 10 years before selling it.

Today, Southern is founder of Pacific Lake Partners, a San Francisco firm that helps entrepreneurs acquire businesses using a two-stage search-fund model: providing money for the search, then assisting with the acquisition. Pacific Lake typically works with recent business school graduates, making available, along with other investors, up to $500,000 to help them find the right opportunity. Once a business is located--usually one in the $10 million to $30 million range--the firm will provide up to $2 million for the purchase.

"The typical search-fund entrepreneur has chosen his investors well," Southern says. "He doesn't have the money himself, but he does have a stable of investors who have been communicating with him for up to two years during the search."

Search funds aren't relegated to any particular sector, says Lisa Sweeney, associate director of the Center for Entrepreneurial Studies at Stanford's Graduate School of Business (GSB) in Stanford, Calif. Generally, businesses that are capital-intensive are not good candidates for acquisition through search funds, "mostly because the back end is coming from a small institution and a number of individual investors," she says, noting that service businesses with more than a few million dollars in annual revenue are often popular targets for search-fund acquisition.

"Search funds tend to be more patient capital than private equity or venture funds," Sweeney says. "They don't have a finite life, like a private equity fund with a 10-year life. If you look at the search funds that have done well, they have an average tenure of 12 years and counting, because many of those entrepreneurs are still running those businesses."

Entrepreneurs interested in pursuing this model of acquisition can approach a firm like Southern's or consult the Stanford GSB's website for information on organizing such a fund. Business owners who believe their company may be an attractive, growth-oriented prospect for search funds should consider reaching out to various search-fund firms to let them know the business might be for sale.

Gwen Moran is a freelance writer and co-author of The Complete Idiot's Guide to Business Plans (Alpha, 2010).

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This article was originally published in the May 2011 print edition of Entrepreneur with the headline: Finding Success.

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