How to start a search fund in 8 steps

How to Start a Search Fund

A search fund is an entrepreneurial path that allows individuals to acquire and operate an existing small to medium-sized business. It involves raising capital from investors to fund the search process and eventual acquisition. Here's a comprehensive guide on how to start a search fund:

1. Understand the Search Fund Model

The search fund model was pioneered at Stanford University in the 1980s. It involves the following key steps:

1. Raise capital from investors to fund the search process and acquisition.
2. Spend 1-2 years searching for a suitable business to acquire within predetermined criteria.
3. Acquire the target business using a combination of the raised capital and debt financing.
4. Operate the acquired business as CEO or President for 5-7 years, implementing growth strategies.
5. Potentially exit the business by selling it to another buyer, providing returns to the initial investors.

2. Determine Your Investment Criteria

Before embarking on the search fund journey, define your investment criteria. This will guide your search process and help you identify suitable target businesses. Consider factors such as:

• Industry: Identify industries you have experience in or are passionate about.
• Geography: Decide on the geographic regions you're willing to operate in.
• Size: Determine the revenue and profitability range you're targeting (e.g., $5 million to $30 million in revenue).
• Growth Potential: Look for businesses with untapped growth opportunities or in need of operational improvements.
• Management Team: Decide if you want to retain the existing management team or replace them.

3. Build Your Investment Thesis

Develop a compelling investment thesis that outlines your unique value proposition as an operator and the types of businesses you plan to acquire. Your thesis should highlight your relevant experience, skills, and the specific strategies you'll employ to drive growth and create value in the acquired company.

4. Raise Capital

Raising capital is a crucial step in the search fund process. Typically, search funds aim to raise between $400,000 and $500,000 from a group of 10-20 investors. These investors could be individuals (e.g., family offices, angel investors) or institutional investors (e.g., venture capital firms, private equity firms).To attract investors, you'll need a well-crafted pitch deck and a strong network. Attend search fund conferences, leverage your alma mater's alumni network, and reach out to search fund investors directly. Be prepared to articulate your investment thesis, target criteria, and the potential returns for investors.

5. Conduct the Search

Once you've raised capital, the search phase begins. This typically lasts 12-24 months and involves identifying potential target businesses through various channels, such as:

• Business brokers
• Online listing platforms (e.g., BizBuySell, Axial)
• Industry associations and trade shows
• Personal and professional networks
• Direct outreach to business owners

During the search phase, you'll need to evaluate numerous opportunities, conduct due diligence, and negotiate terms with sellers. It's a time-consuming and challenging process, but perseverance and a systematic approach are key.

6. Acquire the Target Business

After identifying a suitable target business, you'll need to secure financing for the acquisition. This typically involves a combination of the raised capital, seller financing, and debt financing (e.g., SBA loans).Negotiate the purchase price and terms with the seller, and work closely with your investors and legal advisors to structure the deal. Once the acquisition is complete, you'll assume the role of CEO or President and begin implementing your growth strategies.

7. Operate and Grow the Business

As the new leader of the acquired business, your focus shifts to executing your operational and growth plans. This may involve:

• Optimizing processes and systems
• Expanding into new markets or product lines
• Implementing new marketing and sales strategies
• Recruiting and developing a strong management team
• Pursuing strategic acquisitions or partnerships

Leverage your investors' expertise and networks during this phase. Provide regular updates and seek their guidance when needed.

8. Potential Exit

After 5-7 years of operating and growing the business, you may consider an exit strategy. This could involve selling the company to a strategic or financial buyer, providing returns to your initial investors. Alternatively, you may choose to continue operating the business and potentially raise additional capital for further growth.Throughout the search fund process, it's essential to maintain open communication with your investors, adhere to best practices in corporate governance, and continuously seek opportunities to create value for all stakeholders.Starting a search fund is a challenging but rewarding entrepreneurial path. It requires a unique combination of skills, including deal sourcing, due diligence, negotiation, operational expertise, and leadership. By following this comprehensive guide, you'll be well-equipped to navigate the search fund journey and potentially acquire and grow a successful business.