Having been popular in the US for decades, search funds and entrepreneurial acquisitions are a steadily growing concept in the UK and Europe. One of the reasons for their growth is that millions of business owners are reaching retirement age with no successor.
In contrast to traditional entrepreneurship, where the entrepreneur comes up with an idea and then grows it into a company, the idea of entrepreneurship through acquisition is embedded in the acquired company. In this introduction to search funds and entrepreneurial acquisitions, I explain the process and set out the pros and cons.
What is a search fund?
Search funds are investment vehicles through which aspiring entrepreneurs, known as “searchers,” raise capital from investors with the primary objective of identifying, acquiring, and managing an existing business.
Searchers are typically (but not always) young and ambitious professionals with limited entrepreneurial experience. They leverage the expertise of the investors. Investors provide the necessary capital, mentorship, and industry knowledge to aid in the search, acquisition, and successful operation of a business. In return, they receive a significant equity stake in the acquired company.
What is the process of entrepreneurial acquisitions?
Entrepreneurial acquisitions typically follow the below process:
- Searchers begin by identifying potential acquisition targets. This involves researching industries, market trends, and specific companies that align with their interests and expertise. The goal is to find a business that has growth potential and fits their strategic vision. This can take one to two years and is funded by investors via a search fund. This fund pays for the searcher’s salary during this period as well as any associated searching costs such as initial due diligence.
- Once a target is identified, searchers will raise acquisition funds to purchase the business. Raising acquisition funds typically involves presenting a detailed business plan, financial projections, and a clear strategy for post-acquisition. Investors evaluate these proposals and decide whether the potential ROI is sufficient to risk providing the capital needed to acquire the target.
- After securing funding in principle, the searchers conduct extensive due diligence on the target company. This involves a comprehensive analysis of, for example, the company’s financials, operations, customer base, and competitive landscape. The goal is to assess the business’s health and identify any potential risks.
- If due diligence is successful, the searchers negotiate the terms of the acquisition with the target company’s owners. This includes finalising the purchase price, deal structure, and any post-acquisition arrangements. Once an agreement is reached, contracts are exchanged and ultimately the acquisition is completed.
- After acquiring the business, searchers typically take on the role of CEO. They implement their strategic vision, make operational improvements, and work towards the company’s growth and profitability. The involvement of investors as mentors and advisors can be crucial during this phase.
What are the benefits of search funds and entrepreneurial acquisitions
Search funds allow aspiring entrepreneurs to enter the business world with a reduced level of personal financial risk. They can leverage the expertise and financial support of their investors to acquire an established business rather than starting from scratch.
In addition, the process of identifying, acquiring, and managing a business provides searchers with valuable hands-on experience in entrepreneurship. They gain insights into various aspects of business operations, from financial management to leadership.
Search funds also provide access to capital from experienced investors who often have a network of industry connections. This financial support, coupled with mentorship and guidance, increases the chances of a successful acquisition and business growth.
Finally, entrepreneurial acquisitions can breathe new life into existing businesses, preserving jobs, and maintaining continuity in the marketplace. This can be particularly significant in industries where succession planning is a challenge. For investors, search funds offer a unique opportunity to diversify their portfolios. Instead of traditional investments, they can back promising entrepreneurs and participate in the growth of the acquired businesses.
What are the disadvantages of search funds and entrepreneurial acquisitions
Identifying a suitable acquisition target can be a challenging and time-consuming process. It requires in-depth research, market analysis, and a clear understanding of the searcher’s own strengths and weaknesses. In addition, raising capital for search funds can be a hurdle, especially for first-time searchers. Convincing investors to commit significant funds based on a business plan requires strong presentation and negotiation skills.
Inaccurate or incomplete due diligence can lead to costly mistakes. If searchers fail to uncover critical issues during the due diligence phase, both they and their investors can face significant monetary loss. Therefore, relying on the expertise of legal, financial, and other professional advisors (for example valuers) is paramount to mitigating the risks of acquiring a target company.
Search funds and entrepreneurial acquisitions have emerged as a viable pathway for aspiring entrepreneurs to enter the business world, leveraging the expertise and financial support of investors to acquire and revitalise existing businesses. It also provides owners of the target companies with a feasible succession plan.
Whether you are an investor, target business owner, or entrepreneur, we can assist you with all associated legal matters concerning search funds and entrepreneurial acquisitions.
To discuss any of the points raised in this article, please contact Adam Convisser or fill in the form below.