I admire an aspiring entrepreneur who wants to enter the world of business ownership via the search fund model. You see, I was once that guy. Decades before the term “search fund” was even invented, I left a great job in Orlando with the Walt Disney Company to buy a bankrupt radio business in Nashville. Looking back on it, it was a crazy decision, but for a variety of reasons (some beyond my control), it worked out well. The point being, I know the psychology that drives someone to go through the search fund process.
But, whenever I get an email that starts with the sender telling me how they are different, I immediately assume they aren’t. Nary a week goes by that I don’t receive an email or two from a new search funder. They usually start by telling me, you guessed it, how they are different. Usually, their claimed difference is how they are supported by active investors who are eager to invest alongside the search funder. They almost always go on to describe how their professional, personal and academic background has prepared them for such a time as this.
Last week I received six, yes six, search funder introductory emails. Like I said, after the first few sentences tell me how they are different and ready, the sender usually goes on to describe the kind of company for which they are looking. Here are the search parameters I see 98% of the time: EBITDA of $2 million – $5 million, respected business in stable industry, no customer concentration, owner looking to retire who cares about his/her legacy and demonstrated history of stable earnings with clear unrealized growth opportunities.
Reality check, if I have a deal that meets those parameters, I will be able to pitch it to literally hundreds of potential buyers. You know what happens next? An auction ensues and the valuation is bid up way past what the search fund model is built on, usually 3.5 to 5.0X EBITDA. On the other hand, if you show a search funder a business that is slightly askew of its parameters, they’ll begin to tell me all the reasons it’s not right for them. This might be why I don’t get many repeat emails, I assume they go on to something else eventually.
There are indeed search fund success stories, and those legends fuel new entrants into this hyper-competitive arena every year. But the more the searcher funder world grows, the harder it is for any one searcher to be successful. So let me offer a bit of advice to help you aspiring searchers stand out when making your introductory pitch. Here are seven things that will tell me you really are different. Tell me your spouse or significant other is totally bought into this idea. Tell me you can afford to have zero income for at least three years. Tell me you are willing to sign a bank loan that requires a personal guarantee of your home. Tell me your children will be OK if they don’t see you much for 2 to 3 years after you’ve bought the business. Tell me you are OK if Friday payroll comes and there’s nothing left for you. Tell me you can stomach having 50% of your concerns about a business go unanswered before you make the go decision. Tell me you and your investors will make an operating decision against your best interests if it’s in the best interest of the retiring owner’s legacy.
When I hear these things, I will believe you are well suited to leave a stable corporate job and buy a business.
Tennessee Valley Group
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