Key Topics: CES: Stanford GSB

About Us
- Foster Center
- Leadership
- Contact Us
- Events
- Outreach
- Site Map
Research/Cases
Resources
Teaching
- Courses
- Faculty
Students
- Clubs
- Internships
- Projects
- Courses
- Counseling
- Events
Community/Alumni
FAQs

Related Site

Entrepreneur Resource Database

Search Funds

Conceived in 1984, the search fund is an investment vehicle in which investors financially support an entrepreneur's efforts to locate and acquire a privately held company. Recent MBA and law school graduates are using this approach more and more frequently to become entrepreneurs shortly after graduation, despite their lack of operating experience.

Since 1996, the Center for Entrepreneurial Studies ("CES") at Stanford Graduate School of Business has conducted a series of studies on the performance of search funds (see links below). The CES has identified and tracked over 71 search funds raised since 1984, many of which have purchased companies successfully in the United States or United Kingdom. A 2005 CES analysis of 49 qualifying search funds found investor returns to be over 37%.

Go to the Search Fund Study 2007 [ PDF 101KB]
Go to the Search Fund Study 2005 [ PDF 144KB]
Go to the Search Fund Study 2003 [ PDF 96KB]
Go to the Search Fund Study 2001

Professor Irv Grousbeck, who helped conceive of the search fund and advises many of the entrepreneurs, expects that use of the search funds will continue to grow: "It's the most direct way I know for aspiring MBA entrepreneurs to get into business for themselves. And now that there are many experienced search-funders out there, those who have gone earlier are advising those who have come along more recently. Our objective is to have the search fund model grow, flourish, and be self-supporting, as one wave helps the wave behind it."

Although there is not a standard, cookie cutter approach, search funders in the past have followed a "process" that included:

Networking
Making cold calls
Getting involved in the industry trade
Getting a mentor
Making evaluations quickly, but not casually
Staying focused
Keeping multiple deals in the pipeline
Preferring sole sourced deals to auctions
Being careful of business brokers

Raising the Fund

Search funders should contact high net worth individuals, most of whom were known beforehand. The goal is to amass a group of 10-20 individuals who each contribute $15,000 to $20,000 to fund the search, raising a total of $150,000 to $400,000. These funds are used to pay the entrepreneurs (frugally) and to cover the expenses of the search, which is expected to consume 1 to 3 years.
The search funder should strive to locate investors who can provide advice, counseling, creditability, and above all finances for the search and acquisition. It is ideal to have investors with different mixes of experiences. One investor may simply add moral support, while another will be able to offer operating experience. You want to have thought leaders invest in you. It will enable you to bring more investors in, if thought leaders initially invest in you. Other investors will trust their decision-making.
Search funders have been known to have anywhere from 8 to 25 investors.

Questions to ask investors

What is your investing style?
How will you add value?
How do you want to be involved?
Participation levels (bad times as well as good times)
Liquidity options / preferences?

Types of questions asked by investors

Are you forming a partnership? If so, what are the planned roles? Have you discussed the touch issues? Who is the boss?
What makes you different?
What industries and why? (Focus on process)

Finding a Company

The following criteria are likely to make a business attractive for acquisition:

Profitability.
Growth industry.
Predictable, stable, and recurring revenue.
High EBITDA margins.
Stable contractual relationships.
Simple and easy.
Reasonable pricing.
Enough candidates in the industry available.
Financing available.
No overly dominant competitor or customer.
Limited landscape risk (including technology obsolescence, regulatory risk, legal risk, environmental risk, major cyclically, fads/trendy).
Business services are often preferred, followed by customer services, and specialized manufacturing and distribution. Consumer retail is not typically of interest.
Low to medium technology product or service sectors, rather than the high-tech tech sector
Industry is profitable, not in decline, and attractive to creditors.
Growth potential via follow-on acquisitions, geographical expansion, and/or product/service extension.
Competent middle management willing to remain.
Long product/service life cycles that are not subject to rapid technological change or obsolesce, and that do not require substantial additional R&D.
Product/service differentiation exists or can be created.
Cash flow and assets sufficient to attract and service proposed debt.
Opportunity for liquidity in 4 to 6 years.
The opportunity to create superior returns through revenue growth, operational efficiencies, scale, financial leverage, and improved management techniques.

Buying a Company

Here are some tips from past search funders for negotiating an acquisition:

Qualify the seller.
Understand your seller's motivation.
Sell the spouse.
Understand what YOU can do, including knowing your financing limitations and pricing restrictions.
Understand what really matters to YOU and what does not.
Be yourself.
Be honest.
Negotiate, but know that your reputation matters in the long run far more than this deal.
Don't bluff.
Understand that attorneys and agents work for YOU; don't let them get over- committed.
Make friends with the seller—a sincere friendship.
Don't do business with bad people.
Don't be afraid to regroup and step out.