Entrepreneurship

Search Funds: Buying a Business

The basic search funds model involves raising a pool of money from investors to fund the search for a business. Those investors then have a right to invest in the acquired business. For a detailed description of the search fund process and insights from a great group of successful search funders, see the video below. These five sessions were taped at a Search Fund Entrepreneurs Conference, sponsored and organized by Jim Southern in August, 2008. Ten successful search fund entrepreneurs shared their lessons learned with a group of more than two dozen active searchers. Each session is a separate video, which features remarks by the entrepreneurs and then Q&A.

The first known “search funder” was a 1983 HBS graduate who successfully bought, ran and sold his business. Since then, the model has been executed by well over 100 graduates of top business schools. The basic search funds model is:

• The search funder (or team) raises $200,000-$400,000 to fund their salaries and overhead for approximately two years while they search for a business.
• The money is raised from approximately one dozen wealthy individuals who, in return, get the right (but not the obligation) to invest in whatever business is ultimately purchased. In addition, their initial investment in the search fund vehicle transfers into equity in the purchased business on a “stepped-up” basis, i.e. $25,000 of investment in the search funds becomes $37,500 or $50,000 worth of equity in the acquired business.
• The entrepreneurs/search funders earn an equity interest in the business they purchase – typically a portion vesting at closing, a portion vesting over time, and a portion vesting as IRR performance hurdles are met.

The search fund model has obvious appeal for those MBAs with a strong entrepreneurial drive but no “big idea.” Interestingly, many successful search funders have little direct operating management experience.

Stanford Business School performs a bi-annual study search funds – and has a wealth of other valuable information available on the topic.

Of course, most of the real work in a search fund is the actual search fora business, structuring and financing the business, and then running it. Thus, it has much in common with the world of LBOs, buy-outs and mergers and acquisitions.

LBOs

Web Resources

Free:

• eVenturing: Top Strategies on Buy-Sell Agreements   This guide from the Kaufmann Foundation includes how to's, sample agreements, research and articles around buyouts.
• Inc. com - Buy and Sell a Business   Resource guide on buying and selling a business including articles, links, blogs and more.
• The Business Buyer Resource Center   Collection of articles on buying, valuing and financing a business.
• GlobalBX.com   Free forum to connect prospective buyers and sellers of businesses.
• Businesses for Sale.com   Website which includes information on over 63,000 business for sale.

Books & ebooks

• Merger and Acquisition Sourcebook. The Company, published annually. The Stamps Reading Room, Baker Library | Bloomberg Center, Ref HD 2746.5 M45 This publication tracks trends, mergers, valuations and statistics surrounding M&A transaction on an annual basis.

Journals

Login Required:

• Buyouts (Journal) Login Required A newsletter for management buyouts, leveraged acquisitions, and special situations.
• The Deal.com (Journal) HU PIN Provides news coverage and analysis on M&A, LBOs, private equity, VC, IPOs and bankruptcy.

Cases & Teaching Notes

For Purchase:

• Purchasing a Business: The Search Process Note
• Allen Lane Case

Search Fund Vehicle

Web Resources

Free:

• Stanford Search Fund Studies & Resource Center Since 1996, the Center for Entrepreneurial Studies ("CES") at Stanford Graduate School of Business has conducted a series of studies on the performance of search funds.  2007 is the latest version available.  This site also includes resources, descriptions and links to information on search funds.
• Stanford Search Fund Panel videos Watch two panel discussions from March 3, 2009.
  Panel one, Investor perspective: Lew Davies: Managing Principal, The Cambria Group; Tim Ludwig: Managing Partner, Ohana Capital; Jim Edmunds: Search Fund Partners; and Jim Southern: Former search fund entrepreneur and current active search fund investor. Moderator: Joel Peterson.
  Panel two, Search/Entrepreneur perspective: Chris Hendricksen (GSB '06): Founder, Blue Canyon Capital/President, VRI; Daniel Daum (GSB '06): Managing Director, 8 Wire Capital; Ryan Robinson (GSB '07): Managing Partner, Brown Robin Capital; Chris Miller (GSB '00): Co-Founder, Trumpet Ventures. Moderator: Lisa Sweeney

Articles

Free:

• "Looking for a Company to Run? Search Funds Could Be the Answer" Knowledge @ Wharton, August 22, 2007. This interview includes a description of search funds, and its impact on PE, small businesses and investors. (You must register (free) with Knowledge @ Wharton to access this article).

Cases & Teaching Notes

For Purchase:

• Early Career LBOs Using the Search Fund Model Note
• Mt. Auburn Partners Search Fund Case
• Montelbello Capital (A) Case
• Montelbello Capital (B) Case

Valuation

Web Resources

Free:

• NVCA: Portfolio Company Valuation Guidelines Short explanation of  guidelines around valuation and links to sources of assistance in this regard.
• Valuation Resources.com This free resource guide for business appraisers includes information on business valuation, industries and companies information.

Books & ebooks

• Business Valuations by Industry. The Stamps Reading Room, Baker Library | Bloomberg Center, Ref HG4028.V3 B87 Quality Services. Published annually. Provides data on the sale of thousands of small to midsize companies, and has estimated valuations of these entities by industry group. It is specifically helpful when determining the value of private companies.

Cases & Teaching Notes

For Purchase:

• Valuation Techniques Note