What Is A Search Fund & Why Should You Start One?
May 28, 2024 | By Paul Wolpert, Rhiannon Le Parmentier
Ambitious MBA grads and entrepreneurs aspire to the C-Suite, but even smart, motivated entrepreneurs don’t always have the capability (or desire) to start a company from scratch. However, there is another option that catapults you into the C-Suite and directly into leading a profitable business: you can start a search fund.
History
The search fund model originated at the Stanford Graduate School of Business in 1984. Professor H. Irving Grousbeck helped two students raise capital to buy their first business: this was the first search fund, and the idea caught on. Today, many entrepreneurs find the prospect of potentially high returns on investment along with gaining valuable, immediate leadership experience appealing. So how does a search fund work?
Mechanics
Partners in a search fund will raise capital from a group of private investors. Then, they use that fund to conduct a search in a chosen industry, targeting the acquisition of a platform company. In most cases, they are looking for something they can run themselves, with limited transition help from the seller, and that doesn’t require niche knowledge. Popular industries include healthcare, education, and software. Vela Wood has helped search funds to acquire companies in diverse industries, including landscaping, managed service providers, and internet service providers.
The kind of companies targeted by search funds share certain characteristics:
- Profitable and stable
- Generally valued at $5M to $30M
- Doesn’t require niche knowledge
- Closely held or family business
- The owner is ready to sell and step aside from the business after a limited transition period.
Once the fund finds the target company, they will execute on a letter of intent, take over the business, and start running it. The search fund partners become the new managers of the business and attempt to make it more profitable and valuable through streamlining at the organizational level and through strategic add-on acquisitions. After maximizing value, it’s time to exit the business – most often through a sale at attractive multiples.
The life-cycle of a search fund:
- Raise initial capital to fund the search.
- Engage in the search.
- Acquire the target company.
- Manage the business and maximize value.
- Sell the company.
Vela Wood has helped numerous search funds through all life-cycle stages, and we love to see ambitious entrepreneurs grow to become seasoned leaders through the search fund journey.
About the Author(s)
Paul Wolpert
Paul Wolpert is a partner at Vela Wood and is the Chair of the firm’s M&A practice. He practices in all areas of corporate law, with a focus on M&A and corporate finance. He has represented corporate clients, financial institutions, and sponsors in a variety of U.S. and international transactions aggregating in excess of $15 billion.
Learn MoreRhiannon Le Parmentier
Rhiannon Le Parmentier is a Paralegal at Vela Wood. Her role involves supporting attorneys through complex transactions. Rhiannon graduated from The University of Texas School of Law in Austin, TX with an LL.M. and from University College London with an […]
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