A Search Fund: Why Did I Start One?
Search funds, also known as entrepreneurship through acquisition, are becoming popular globally due to their consistent returns and success stories. The process allows an entrepreneur (known in the industry as a searcher) to partner with investors to search, acquire and manage a small and medium-sized enterprises (SMEs). The role of the entrepreneur is to become the full time CEO of the acquired company, and to take it to the next level with the support from his investors.
The day I uncovered the world of search funds was a thrilling revelation for me. All thanks to an invitation I received to attend a webinar titled: “What are Search Funds and What Makes Them So Special?” organized my Moonbase Capital, a seasoned search fund investor in Europe.
I instantly and instinctually knew that launching a search fund offers a perfect alignment for my entrepreneurial and CEO acumens. My career journey has been a fusion of diverse experiences, from my tenure at McKinsey & Company to launching startups across different countries to finally serving as the CEO of a well-established group of companies in the Middle East.
So, let’s explore all the benefits that attracted me to launch Forás Capital, Ireland’s first search fund:
6 Benefits of Starting a Search Fund You Must Know
1. Reduced Risk
Starting a new business is a big and often risky task, but entrepreneurs can enjoy reduced risk with a search fund. By buying into an existing operation, search funds provide a safer alternative to starting from scratch. Statistics reveal that 90-95% of start-ups fail within the first five years. Building a business from the ground up is an overwhelming journey, with many obstacles and uncertainties along the way. Search funds typically invest in companies that have been in existence for a minimum of five or seven years. This means that these businesses have a proven track record and have already overcome many of the challenges faced by start-ups. In other words, by investing in an established company, a search fund entrepreneur reduces the risk associated with starting a new business and provides his/her investors with a safer and more secure investment option.
2. Healthy Cash Flow
Cash flow is a critical component of any business. This steady flow of income is essential for the growth and expansion of the business. It provides the funds needed to support operations and pursue new opportunities. Buying a well-established company allows search funds entrepreneurs to enjoy the advantage of a more reliable source of income and provides the resources needed to drive the business forward. In addition, a healthy cash flow offers the opportunity to pay down debt. Search funds acquisitions often involve a debt component, and the steady cash flow can be used to repay this debt, enhancing the returns for entrepreneurs and investors.
3. Access to Experienced Human Talent
One of the key benefits of buying an already successful company is access to experienced human talent. The middle management provide valuable support and serve as trainers for future team members. “Culture eats strategy for breakfast” and the core of any culture is the team who are often the most valuable asset an entrepreneur is acquiring.
4. Established Sales Pipeline
Another advantage of buying a well-managed business is access to an existing sales pipeline. Companies targeted by search funds already have established relationships with customers and suppliers. These businesses typically have a high-level of recurrent revenues, and a diverse pool of customers. This gives assurances for investors and lenders that this is a company that will be able to grow and to meet its debt obligation. In other words, it is a safer bet while having the option to scale up and enhance returns.
5. Credibility for Expansion
A company that survived for more than 7+ years has already earned a good reputation in the market. This credibility is highly beneficial when approaching new clients and sectors. It provides a solid foundation for building relationships and expanding the business. Potential new customers and suppliers can easily verify this credibility, providing added confidence in the business and its ability to succeed.
6. Access to Best Practices and Knowledge
Companies that have been profitable for several years, which are the typical target for search funds, are market-hardened and have developed best practices and certain level of operating procedures (not necessary in writing). It takes a new company years of trial and errors to build such know-how. Acquiring this body of knowledge is very valuable for searchers.
In conclusion, starting a search fund presents several benefits for entrepreneurs: reduced risk, healthy cash flow, access to experienced human talent, an established sales pipeline, credibility for expansion, and access to best practices and knowledge.
Moreover, the search fund model offers a safer alternative to starting a new business from scratch and provides entrepreneurs with a steady source of income and access to established networks, skills, and knowledge. The opportunities and advantages of starting a search fund make it an ideal option for entrepreneurs looking to grow their businesses and succeed in the long run.