Pathways to Successful Business Acquisition in Search Funds

This is my first conversation on this podcast with more than one person. I'm meeting with the team from Searchfunder.com, an online community dedicated to search funds and the various parties involved. A search fund is the smallest form of micro private equity I've found thusfar and is typically one entrepreneur seeking out a company to buy and run as the CEO. The team consists of the two co-founders, Luke Tatone and Mark Yuan, and their COO Karen Spencer, all of whom are graduates of MIT. Luke is the first speaker, followed by Mark, and finally Karen.

During our conversation, we discuss what a search fund is, how they're structured, who participates in search funds, and how they've evolved over time. If you are interested in running/buying/or even starting your own company one day, this conversation is for you.

I met the team after signing up on Searchfunder only to discover all three of them lived here in Portland, OR. Mark initially reached out and invited me to coffee where we chatted about all things search funds and I quickly met the rest of the team. This conversation is the result of one of my most recent, and favorite, small world stories. I hope you get as much value out of this conversation as I did.

Links mentioned

• Stanford Report
• Asurion
• Stanford 2018 Report
• Housatonic Partners
• Alpine Investors
• Peterson Partners

Show notes

1:38 What is a search fund? Structure, goals, parties that participate

3:08 Harvard business school: Royce Yudkoff, Richard Ruback, Jim Sharpe

3:26 Search fund accelerators

4:18 What individuals create search funds?

5:38 Risks of launching a start-up vs running a search fund

7:20 Shift from finance professionals to operational professionals

7:47 Most valuable experience to have had prior to launching a search fund?

9:00 It is important to investors that you're able to lead a team

9:32 Number of searchers that Searchfunder.com has studied and had on the site

10:01 Strong growth in number of search funds launched and corresponding acquisitions

10:34 Number of search funds formed last year compared to five years ago

11:09 Reasons for growth in number of search funds

11:30 Who are these searchers buying from and why is the owner selling, normally?

12:22 Steps in creating a search fund and acquiring a company

13:30 Best thing to do to learn about search funds, intern for one

15:44 Importance of practice and repetitions

21:33 Average distance between the searcher and the company eventually acquired

24:19 Normal size range and multiple size of companies acquired

25:44 Why do these companies have lower multiples than larger companies?

26:30 A business is only as worth as much as someone is willing to pay

27:27 Lower bound of company size in search funds

27:51 What types of companies are these search funds buying?

29:00 Examples of companies acquired

39:14 Role of interns

40:01 How many companies close after signing an LOI?

40:40 Structure of deals

41:58 Using seller note

42:39 Benefits to self funded in terms of deal structure

43:09 What should a searcher do in their first year with the new company

44:35 Holding period

45:55 Search fund market on Searchfunder.com

46:15 Stanford report on search funds

47:45 Why they started a site on search funds instead of a search fund

49:43 Would you like to run a search fund in the future?

50:15 How Karen joined Searchfunder.com and importance of your alumni network

50:55 More than just search funds on the site, goals for the site

53:11 Gap between mature private equity and micro private equity/search funds

53:37 How do these larger private equity firms access this space?

55:08 Economics of mature private equity firms buying these small companies with in-house staff

57:33 What's the most fortunate event to have happened to you by chance?

1:00:40 Best business you've ever seen