What Is A Search Fund?
A search fund - also called entrepreneurship through acquisition - is a niche type of investment vehicle used by entrepreneurs looking to acquire a company they will take an active role in - usually as a CEO. The term 'search fund' comes from the fact that, in many cases, the entrepreneur may not have identified a company they want to acquire. However, they know they have the skills and experience to rise to 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 who don't have this specific experience still have the relevant skills to step into an established company as CEO based on their education, business acumen, natural talents and skill set. An individual who had a pivotal role in a successful start-up or a senior manager who's delivered growth for a successful business may have the necessary expertise to be an entrepreneur, for example, despite the fact they haven't launched their own business. These individuals have the required skills and experience to step into a high-potential firm and define the business' strategy, goals and budget with the aim of growing the company in terms of revenue and market share before an exit in a predefined number of years. For this reason, many 'up-and-coming' individuals of all ages use search funds, essentially putting an entrepreneurial spin on their experience to buy out a business and grow it under their own direction.
By looking to acquire a business and run it in the capacity of CEO, entrepreneurs can bypass the need to start their own company. They step into a high-potential business in a controlling position where they can utilise their skill set to grow the company before exiting. In this sense, search funds are ideal. Entrepreneurs can target acquiring a larger and more established business rather than small set-ups with limited revenue and a small workforce where it may be harder to gain traction quickly, generate a significant increase in income or grow market share.
How Do Search Funds Work?
A search fund (in the first instance) gives the entrepreneur access to capital needed to have a reasonable salary while actively conducting their search for a company to acquire over a predefined period - generally 12-24 months. This is important as these individuals are usually seasoned professionals or already have an entrepreneurial background that sees them earning a good salary that they can't afford to give up in entirety. Some entrepreneurs opt to self-fund their search using savings, but for many individuals, this isn't viable as they don't have access to this kind of liquidity, and saving it would delay the start of an acquisition project, usually by some years.
A portion of the initial search funds are usually set aside for costs directly related to a search such as legal fees, fiscal advice, broker fees and so on. In the second step, a search fund will provide capital to acquire an identified business. The finance is set up so that the entrepreneur (usually the incoming CEO) will receive an initial equity stake in the business, with further equity given as certain milestones are met within specific timeframes, up to a maximum percentage. A 100% stake in the company is usually acquired, and the rest of the equity is set aside for the search fund's lender or investor(s), with everyone effectively 'cashing in' on their investment at exit.
Raising Finance For Search Funds
Search funds can be financed in various ways, including self-funding, where the entrepreneur will use their own capital or savings to finance a search. This is usually the path for individuals looking to 'cut their teeth' by acquiring a smaller business. Entrepreneurs self-funding a search usually have personal capital reserves to use to live off and pay deal fees. They are also typically confident they can raise finance for the acquisition as and when they source the right company to step into. For this reason, this avenue tends to be used for smaller acquisitions - in more significant deals, financing is usually more complex and needs to be planned in advance.
Investors have typically financed search funds in the past, and some lenders now offer finance for this kind of venture as well. Search fund financing is often provided by boutique, independent lenders who specialise in lending to entrepreneurs - search funding is a subset of this sector within corporate finance.
Search financing can be higher risk than other types of lending, given the entrepreneur usually has a business record, but the ability to deliver growth in the acquired business will be intangible, and there is a possibility that they may not find a company to acquire.
Despite the risks relating to this kind of finance, lenders are willing to step in to provide search funds to entrepreneurs. This is an exceptionally niche part of the market, especially for any entrepreneurs with the desire and expertise required to take over and acquire a medium-sized business (valued at £5 million or more) or a small but thriving business (which is usually considered to be anything with a valuation of around £2 million).
Entrepreneurs will need to have an excellent track record in business (preferably of growing a company in terms of revenue) that they can demonstrate to lenders, as well as a well-laid-out plan detailing how they will go about their search, including time frame, the various criteria they have for the search and previous participation in identifying merger or acquisition opportunities from past work experiences. They will also need to demonstrate staff management skills, experience in the relevant market they want to acquire a business in, and show their financial track record within a company (including budgeting, capital management skills and so on). All this must be recorded and, wherever possible, backed by solid evidence and documents rather than anything anecdotal. Entrepreneurs will usually also need to have some of their own capital to invest into the business upon acquision.
Using Enness As A Broker For Search Fund Finance
Enness specialises in arranging corporate finance facilities of all sizes and can assist entrepreneurs in raising search funds in a particular and niche part of the lending market that needs to be navigated carefully. We will work to understand your requirements for finance and goals and then present these to lenders in the best possible light, highlighting strengths, providing additional context where we know lenders will have questions and managing the process formally, working in your favour to get the best deals available. While some lenders publicise their services in the space, others will not, and we have access to all the parties that can offer search fund finance, including those that can consider niche industries or unusual scenarios. Get in touch to understand how we can help you, our methodology for helping you raise finance for a search fund, as well as our added value, expertise and approach.
The views and opinions expressed in this piece are those of the author and do not constitute advise or a recommendation