For a company owner considering all potential exit strategies, selling the business to a newly minted MBA grad may not be the first thing that comes to mind.
The search fund, a private investing vehicle borne out of business schools known for producing well-networked and operationally savvy graduates with an eye on the CEO chair, figures into a steadily growing category of buyers of small and medium-size private companies.
Backed by institutional investors and often friends and family capital, search fund principals conduct a one-time search to find, acquire and then run a privately held business. These individuals known as "searchers" are typically entrepreneurially spirited MBA grads or former investors looking to spend some time at the helm of a company.
After spending months honing in on an industry and business that they believe is the right fit, a searcher will make the acquisition, relocate to headquarters and become the new owner-operator of the company. The model can be a best-of-both worlds scenario for a business owner who wants to exit his or her company but has no effective succession plan.
Selling to a search fund can be a compelling option, particularly for company owners without a natural heir or those who want to avoid private equity restructuring or the brand dissolution can result from a corporate acquisition.
While some skepticism arose over the search fund model in its early days, continued success (and average returns north of 30 percent) has led to significant growth of the category in recent years.
As more and more business owners retire over the next decade, the search fund model will become a meaningful part of the private investment ecosystem and a more popular choice for existing owners. In the meantime, here are five reasons a business owner might consider selling to a search fund:
1. Not wishing to be the CEO.
For an owner who never aspired to be CEO or perhaps wants to move on from the role, selling to a search fund presents an interesting option.
Maybe he or she is ready to retire or perhaps just wants to scale back on activities or take on a different role in the business (say focusing on engineering or sales) instead of running the entire company. Selling to a search fund gives an owner the opportunity to quickly transition out of the CEO role, liquidate his position in the business and move on to his preferred second act.
2. Wanting to preserve the vision.
A searcher’s primary goal is to identify a profitable company that he or she wants to manage. In most cases, this would involve a sector in which the searcher has experience and passion. As such, searchers tend to hold dear the vision and foundation upon which a company was built.
The search involves finding a company with solid financials, strong operations, a hardworking employee base and loyal customers. The process of finding such a fit is laborious and lengthy, but it’s a one-time search.
A successful searcher finds a company he or she can stick with for the long haul and upon closing the search immediately becomes engrossed in and dedicated to managing that one company, stepping seamlessly into the shoes of the departing CEO.
3. Wanting the management team to remain intact.
A search fund is typically composed of one operational partner supported by a few financial backers. His successful transition into the company will rely on the buy-in of existing management and the broader employee base.
Unlike selling to a competitor, vendor or other strategic buyer (who may roll the business into existing departments with their management teams) or to a financial buyer with the power to insert his or her own operational partners, selling to a search fund provides one way to ensure that most of an existing management team will remain intact.
4. Hearing that the business is “too small.”
Search funds make particular sense for business owners who may have been told by private equity or strategic buyers that their enterprise is too small. A search fund will typically aim to buy companies in the sub-$50 million range, without complex assets and demonstrating a straightforward business model.
5. Believing in the next generation of entrepreneurship.
Perhaps a current business owner inherited a company from a father or grandfather or had an early start after receiving an MBA, being in a related field or being brought into the business by a mentor.
A business owner who sells to a search fund is fundamentally about favoring passion, determination and ambition over experience, management and operational expertise and being comfortable with that trade-off. In the history of American business and entrepreneurship, lots of success has come from others making similar types of trade-offs.