Benefits Of Search Fund Finance

What Is A Search Fund?

A search fund, also known as entrepreneurship through acquisition, is a niche investment vehicle used by entrepreneurs looking to acquire and take an active role in running an established company, usually as CEO. The term ‘search fund’ comes from the fact that, in many cases, the entrepreneur has not yet identified the company they want to acquire. Instead, they know they have the skills, experience and ambition to take on the challenge when they find the right opportunity.

Who Uses Search Funds?

Most people think of an entrepreneur as someone who has founded, built and grown a company from scratch. However, many individuals without this specific experience may still have the skills required to step into an established company as CEO based on their education, business acumen, leadership experience and professional track record.

An individual who played a pivotal role in a successful start-up or a senior manager who has delivered significant growth for an established business may have the expertise to become an entrepreneur, despite never having launched their own company. These individuals may have the skills and experience to take control of a high-potential business, define its strategy, goals and budget, and work towards growing revenue and market share before an eventual exit within a predefined timeframe.

For this reason, search funds can appeal to ambitious individuals at different stages of their careers, allowing them to use their experience to acquire a business and grow it under their own direction.

By acquiring a business and taking on the role of CEO, entrepreneurs can bypass the need to start a company from scratch. Instead, they can step into an established business in a controlling position and use their skill set to drive growth before eventually exiting. This can allow entrepreneurs to target larger and more established businesses rather than smaller start-ups with limited revenue or a small workforce, where gaining traction and generating significant growth may take longer.

How Do Search Funds Work?

In the first instance, a search fund provides the entrepreneur with capital to support themselves while actively searching for a company to acquire over a predefined period, generally between 12 and 24 months. This is important because these individuals are often seasoned professionals or experienced entrepreneurs who may already be earning a substantial income and cannot necessarily afford to give this up entirely while searching for an acquisition opportunity.

Some entrepreneurs choose to self-fund their search using personal savings. However, this is not always viable, particularly where the entrepreneur does not have sufficient liquidity available or where saving the required capital would delay the acquisition project by several years.

A portion of the initial search funding is usually allocated to costs directly associated with identifying and assessing potential acquisition opportunities, including legal fees, tax advice, broker fees and other professional costs.

Once a suitable business has been identified, the next stage is raising the capital required to complete the acquisition. The financing is typically structured so that the entrepreneur, who will usually become the incoming CEO, receives an initial equity stake in the business. Further equity may be awarded as certain milestones are achieved within specific timeframes, up to an agreed maximum percentage.

In many cases, the acquisition involves purchasing a 100% stake in the company, with the remaining equity held by the search fund’s investors or other capital providers. The entrepreneur and investors are then aligned in working towards increasing the value of the business before an eventual exit.

Raising Finance For Search Funds

Search funds can be financed in several ways, including self-funding, where the entrepreneur uses their own capital or savings to finance the search. This approach is often used by individuals looking to ‘cut their teeth’ through the acquisition of a smaller business.

Entrepreneurs who self-fund their search will usually have sufficient personal capital to support themselves and cover deal-related costs. They may also be confident in their ability to raise acquisition finance once they have identified the right business. For this reason, self-funding is more commonly associated with smaller acquisitions. For larger transactions, financing can be more complex and may need to be considered well in advance.

Historically, investors have provided much of the capital used for search funds, although some lenders now offer finance for this type of venture. Search fund financing is often provided by boutique and independent lenders specialising in supporting entrepreneurs, representing a highly specialised area of corporate finance.

Search fund financing can carry more risk than some other forms of lending. While the entrepreneur may have an established business track record, their ability to deliver growth within the acquired company is not guaranteed. There is also the possibility that they may not identify a suitable business within the agreed search period.

Despite these risks, investors and specialist lenders may be willing to provide search fund finance to entrepreneurs with the right experience and profile. This is an exceptionally niche area of the market, particularly for entrepreneurs looking to acquire a medium-sized business valued at £5 million or more, or a smaller but thriving business valued at around £2 million.

Entrepreneurs will typically need to demonstrate an excellent business track record, ideally including experience of growing a company’s revenue or value. They will also need a detailed plan setting out how they intend to conduct their search, including the timeframe, acquisition criteria and any previous experience identifying merger or acquisition opportunities.

Lenders and investors may also consider leadership and staff management experience, knowledge of the relevant sector, and the entrepreneur’s financial track record within previous businesses, including budgeting and capital management. Wherever possible, these credentials should be supported by evidence and documentation rather than anecdotal claims. Entrepreneurs may also be expected to invest some of their own capital into the acquisition.

Using Enness As A Broker For Search Fund Finance

Enness specialises in arranging corporate finance facilities and can assist entrepreneurs looking to raise search fund finance in a highly specialised area of the lending market that requires careful navigation.

We work to understand your financing requirements and acquisition goals before presenting your case to suitable lenders and capital providers. This includes highlighting the strengths of your experience and track record, providing additional context where lenders may have questions, and managing the financing process to help identify the most suitable options available.

While some lenders actively publicise their services in this space, others operate more discreetly. Our network gives us access to a range of potential funding sources, including those able to consider niche industries or more unusual acquisition scenarios.

If you are considering raising finance for a search fund, speak to a finance specialist to discuss your requirements, our approach to structuring search fund finance and how Enness may be able to assist with your acquisition plans.