Search Fund Support Programs

November 12, 2021 | Issue #50

Big Deal Small Business: Search Fund Support Programs

November 12, 2021 | Issue #50

Believe it or not, this is my 50th newsletter post!

Over the past 7ish months, I’ve gotten to connect with a number of readers who range from searchers, prospective searchers, investors, operators, advisors, etc. It’s a niche readership group but it definitely feels like I’ve found “my people” i.e. people who don’t find all of this SMB acquisition stuff boring or crazy.

So a big thank you to everyone for reading, commenting, sending feedback, and more. If you’ve got ideas for future posts, I’m always all ears. If you’ve got something you want to write for the community, I’m happy to have guest writers occasionally - just let me know what you’re thinking and we can workshop it.

Okay, let’s flip into today’s topic - the different forms of search support that exist out there. This ties in very closely to picking your investors, which I’ve written about before, because often the support services you use are provided by prospective investors.

However, that post focus on how to select investors for the operations phase of the process. Today’s post is focused on support services during the search phase of the process.

(By the way, today’s sponsor is highly related to this newsletter as you’ll see below. This newsletter post was partially inspired by a discussion with the host of Acquiring Minds.)

This Post's Sponsor: Acquiring Minds

Traditional...or self-funded. That is the question.

Chris Williams started traditional and found a great business.

But it was too small for traditional.

Months later his search had evolved to self-funded -- now that $1m EBITDA business was in his sweet spot.

He bought it.

Lesson? Stay open to the many flavors of search. Listen to his interview on Acquiring Minds.

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Key Processes in Search

During the search phase, there are several key processes to manage:

• Deal generation

• Broker relationships

• Expert relationships

• Advisor relationships

• Banking relationships

• Pre-LOI diligence

• LOI negotiation

• Post-LOI diligence

• Definitive documentation negotiation

• Closing workstreams

I would roughly categorize these into three buckets:

• Deal Making

• Due Diligence

• Documentation

Deal Making involves deal generation, broker relationships, financing sources, LOI negotiation, and more. It requires threading many needles to find a good business, that you like, at a fair price, with a willing seller.

Due Diligence involves industry experts, financing modeling, qualitative diligence, quality of earnings, etc. It's the trust but verify step in the process and requires using people smarter than you (i.e. costs money).

Documentation is the nuts & bolts of an acquisition. This requires strong legal counsel on both sides and a keen sense of what matters and what doesn't. Deals die on the drafting table without that.

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Search Support Options

There are three primary search support options that I'm covering today:

• Traditional Search

• Search Accelerators

• Self-Funded Searcher Support Programs / Incubators

Below is a quick overview of the search phase support you can expect to receive in each of the above models.

Traditional Search Funds

These are probably familiar to folks if you've gone through the basic intro to search learning process.

Based on my conversations with traditional searchers, the key support they get is not having to recreate the wheel. As a self-funded searcher, I have to go find my own lawyer, my own CPA, my own everything. Traditional searchers can generally look to their investors to make strong advisor connections.

Similarly, repeat traditional investors like Trilogy or Pacific Lake have witnessed years of best practice across multiple search funds when it comes to deal generation and deal underwriting. They can help their new searchers shortcut learning cycles by guiding them in the right direction from the outset.

The self-funded approach can be more meandering as you figure out what works and what doesn't, as I'm sure is clear in my newsletters for those of you who have read from the beginning.

Search Accelerators

There are several different search accelerator models. Based on my research, they look & feel like a traditional search fund but with a very hands-on primary investor.

Examples of search accelerators include Broadtree and Search Fund Accelerator.

You will likely be in a cohort of a handful of searchers that are working with the same mentor/advisor. That mentor/advisor has generally completed many deals themselves and assisted many searchers in closing their deals.

You will often work in the same physical location as your cohort or mentor, and there will be some kind of bootcamp to kick off your search.

I think it's comparable to a company hiring an investment banker to help them complete add-on acquisitions if they don't have a corporate development group. The accelerator folks live & breathe small business M&A, so they should be able to guide you through the minutiae of that process.

The key difference between this and the traditional search fund model is the accelerators will likely be far more hands-on and provide day-to-day support while traditional investors are more week-to-week or month-to-month. The trade-off is that you generally end up with a single investor (the accelerator) which comes with its own set of concerns.

Self-Funded Search Support Programs

These programs look & feel a lot like search accelerators, but they generally do NOT pay the searcher a salary or cover deal expenses. These are designed for self-funded searchers who want mentorship & assistance to get a deal done. As a result, searchers end up with a lot more control of their search process and ultimate equity in their deal.

Examples include SIG and Pursuant Capital.

In these programs, your mentors will support you with advisor & expert relationships, legal document templates, and general advice, very similar to the search accelerators.

They may also have a bootcamp or cohort-model to provide a strong kick off to your search and ongoing community.

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Which Program Is Best For You?

It depends. Here's a super simple framework I created:

"Have Money" is based on having enough money to 1) cover living expenses while you search and 2) cover deal costs.

I would assume deal costs of $50K per deal, and a reasonable likelihood of one deal breaking with $25-50K of dead deal expenses. So in theory, you'd want $75-$100K of liquidity for deal costs.

Living expenses depends on the person and is obviously impacted by if you are making money via a side hustle, consulting gig, or I don't know, a newsletter with ads in it.

At risk of over-generalizing, if you're an MBA student that burned a lot of your pre-MBA savings on tuition or took on student debt, odds are the best bet is a traditional or accelerator model.

In that bottom row, if you have no M&A experience, the handholding of an accelerator is likely worth the trade-off in deal control & investor selection. If you do have M&A experience, you may not need that and would prefer to run your own, more robust process.

If you "Have Money" and are okay with the risk profile of personally guaranteeing debt, the best program depends on your background. If you have never done an acquisition before, I think having a real mentor through the self-funded support programs would be incredibly valuable.

If you have done acquisitions before (I'm in this camp), I would optimize more for the best post-closing set up. In my case, that means selecting investors carefully, ensuring they are aligned with my long-term vision, finding operational folks interested in being mentors, etc.

People in this top right box should have the easiest time getting a deal done, and the highest odds of blowing themselves up post-closing.

Before I wrap up, please allow a big caveat - these are generalizations, your mileage may vary, your situation can't neatly be forced into a 2x2 grid, etc.

Conclusion

I hope that's a hopeful overview of search support options and the pros/cons of each for different types of searchers.

The good news is that everyone I've interacted with at these programs (traditional search investors, accelerators, self-funded support) have invariably been super friendly & collegial.

If you're not sure what's right for you, I would encourage you to reach out to any and all of them. They live & breath search - a 30-minute call with each program will be eye-opening.

As always, I welcome your thoughts, criticism, and feedback - it helps me learn & evolve in my search process too. Just hit reply to this email or find me on Twitter.

Thanks,

Guesswork Investing

P.S. I’d always appreciate introductions to potential acquisition targets or brokers (primarily targeting $750K-$1.5M+ of SDE or EBITDA, located in Seattle or the Bay Area).