Search Fund/Entrepreneurship Through Acquisition

B-School's best kept secret

What is the model?

You are an MBA grad who wants to become a CEO but doesn't necessarily want to through the corporate career ladder. So you raise money to acquire a business and become its CEO. Sounds too good to be true? It happens all the time and there is a whole ecosystem to support function. The model is called “Entrepreneurship Through Acquisition”

How does it work?

The business being acquired are usually small to medium sized business with value of $5M to $25M. Usually they are traditional cash flow positive business in a fragment sector, often they involve an HVAC company, a small production, IT service or some other service business. The businesses are usually family run, the owners are old and retiring, and want to cash out for health reasons, or because the kids don’t want to take over the business or some other reason.
So you raise $300K-$600K to first find a business to acquire, this is called a “search fund”, and finding the business takes from 1 to 3 years. The investors are search fund investors, small PE funds or wealthy individuals. After acquiring the business, you hold it and operate it for 5-7 years and then sell it to another PE fund or a strategic buyer. The acquisition is financed in part by debt, seller financing and additional equity investment by the search fund investors or new investors.

Why was I interested in it?

I’m very bullish on the new value being created by AI, but I’m unsure if building a software/AI company is the best way to capture the value being created. The thought was, instead of selling AI, “can I become a business which can be transformed by AI”, which led to exploration in this direction.
I consumed a bunch of content around search funds, spoke with multiple present and past searchers, joined searchfunder.com, traveled to Chicago to meet search fund investors, lawyers and brokers.

Why I probably won’t pursue it?

The search process takes too long, and the search fund outcomes aren’t particularly big. So I’ll probably won’t be pushing further in this direction.

Resources

• Stanford Search Fund Primer https://www.gsb.stanford.edu/experience/about/centers-institutes/ces/research/search-funds/primer

• ETA Podcast by Polsky Center for Entrepreneurship and Innovation at Chicago Booth https://open.spotify.com/show/2FJXqCmBDfIHmCb4eyXdVVhttps://www.searchfunder.com/

• NextGenPartners Searcher Checklist https://nextgengp.com/searcher-checklist/