Industry Insights

If you’ve ever purchased insurance for your cell phone you might be familiar with the company Asurion, the global provider of device insurance, warranty, and support services. What you might not know is that Asurion was one of the early “Search Fund” successes, grown from a company purchased in 1994 by two Stanford MBAs with backing from Search Fund investors. The business had 40 employees when they bought it; Asurion now has over 23k employees and is a multi-billion-dollar, industry-leading company.

How The Search Fund Model Works

The Search Fund model, where entrepreneurs, often recently-minted MBAs, acquire closely held businesses, has proliferated since the first funds launched in 1984. The 2022 Stanford University Search Fund Study indicates that in 2020-21, there were 124 Search Funds launched and a record $776 million invested in the funds and their deals. Backers can include experienced individual and institutional Search Fund investors, in addition to business owners, executives, associates, and friends and family. Searches are generally funded for 24 months, so the entrepreneurs involved are highly motivated to find and close on the right deal. Recurring revenue businesses with $2 million EBITDA+, including SaaS, subscription, and other tech-enabled services, are of primary interest to Search Funds and their investors.

Unique Qualities

The Search Fund model has some unique qualities when compared with other business acquirers of closely held companies. Search Funds blend the motivation, passion, and smarts of entrepreneurial MBAs, with the wisdom, experience, and deep pockets of their investment team. It’s a unique hybrid approach to business acquisition offering an exit worth considering for the right business and owner. 

Here are 5 reasons to consider a search fund buyer when selling your $2 million+ EBITDA, recurring revenue business:

1. No lengthy transition or owner handcuffs

Because Search Fund operators seek to acquire just one business and run it themselves, there is less need for owners to stay on post-transaction. While some transition is generally required to ensure the new team is positioned for success, the new owners usually seek to take the reins as quickly as possible. Private Equity groups and strategic buyers, by contrast, may require the seller to stay on for a period of time and are more likely to require the owner to roll over equity or tie a portion of the purchase price to achieving goals after the transaction.

2. Preservation of your brand and legacy

Business owners are often coached by CPAs, bankers and brokers that strategic buyers are the best option when considering an exit. Whether a competitor, customer, supplier, or other industry player, “a scenario where 1+1=3 will yield the best outcome”. While it’s true strategic buyers generally have more valuation flexibility than financial buyers, they are typically seeking to roll the seller’s operations into their own. Likewise, Private Equity firms often seek to grow businesses through acquisition, consolidating operations. In either case, your brand and legacy could get lost in the shuffle. As entrepreneurs and owners themselves, Search Fund operators are more likely to become invested in what you’ve built, keeping your brand and legacy intact.

3. Fair purchase price

The median purchase price for a Search Fund acquisition during the 2020-21 timeframe was $16.5 million. Median purchase price multiples were 7.3x EBITDA and 2.1x revenue. For those Search Funds reporting a multiple of Annual Recurring Revenue, the median multiple was 3.4x ARR. While 2020-21 multiples were higher than for prior periods, possibly reflecting the overall economic cycle, these averages are generally in line with other financial buyers for businesses of this size, whether private equity, family office, or otherwise.

4. Potential for a cash deal

While they do not have “committed capital,” Search Funds are typically well set up to finance a deal. Their investors provide the upfront capital for the search itself, usually $400k+ per searcher, in exchange for the right to invest once a deal is identified. With an aggregate pretax return of 35.3% internal rate of return (IRR), investors are generally eager to participate in good deals. Since 2015, each Search Fund acquisition has had a median of 16 investors. With the equity portion of the deal covered, Search Funds can then use debt to fund the remainder. As a result, there is often potential for a mostly, if not all-cash deal.

5. Employees are more secure post-transaction

With a median age of 32, Search Funders are young entrepreneurs. Most will not have been in a CEO role prior to their acquisition. As a result, they favor acquiring companies with a solid employee base that can support them as incoming CEO. They are ideally not looking to make significant staffing changes. By contrast, strategic buyers often seek to eliminate redundant positions and Private Equity buyers seek to streamline operations. A Search Fund might be the buyer most likely to retain and support your employee base after a transaction.

Source of Funds

If you are considering a sale to a Search Fund, it’s important to understand the source of the fund’s capital. On one end of the spectrum, there has been a proliferation of free agents calling themselves “Search Funds” that have not actually raised capital from external investors. On the other end, much of the equity into Search Funds now comes from firms with committed capital funds themselves. Engaging with a non-funded group significantly increases financing risk, while engaging with a group backed by investors with committed capital significantly decreases it.

Bottom Line

Selling to a Search Fund with strong backing can be an interesting exit alternative for owners of businesses with predictable revenue and $2 million+ EBITDA. The model has some unique attributes allowing benefits to the seller that may be unavailable with other types of acquirers. If you are looking to sell a business that fits this profile, it’s definitely worth considering a Search Fund buyer.

We hope this information is useful as you consider your options for selling your business. We operate Hatchit, the global deal directory for brokered and for-sale-by-owner online businesses with valuations ranging from $25k to over $20 million. Using our extensive industry knowledge, we offer a broker match service to help you find the right assistance for your seller needs.

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