The rise of search funds

8 April 2024 / Insight posted in Article

What is a search fund?

A search fund, also referred to as entrepreneurship through acquisition (ETA), is an investment vehicle in which investors back an entrepreneur looking to acquire and run their own business.

Search funds have become more popular across Europe in recent years, after originating in the 1980s out of US business schools Harvard and Stanford.

How does it work?

The typical process involves the searcher or pair of searchers finding the right company to acquire. This can sometimes take years, and the investors behind the searchers usually fund this process with search capital by paying the searcher a salary during this stage.

As the searchers are looking to take over the running of the business, they search for companies where the current owners are planning to retire or step away from the business, and where the businesses are already well established. Additionally, the searchers probably have a set of criteria, including size (specifying a revenue and EBITDA range), location, industry, a strong management team and opportunities for growth.

Having identified a suitable target, the searcher engages with various advisers to assist with the acquisition. This includes due diligence, which is typically paid for by the search capital initially raised. Another funding round then takes place for acquisition capital.  It’s worth noting that debt is often still required as well as the equity provided by investors. More and more lenders in the UK are supporting search fund transactions as they grow in popularity.

On completing the transaction, the searcher steps into a leadership role (such as CEO) and takes over the running of the company. The searcher usually has both business and sector experience to enable them to take on this role.

Is this the same as private equity?

Search funds, although a type of private equity, are different from typical private equity investments. A search fund aims to run the business for longer than say the three-five years that a private equity firm may invest for. It generally has a longer-term growth plan, often +10 years. Search funds are usually only interested in a majority stake, usually 100%.

How we can help

The transaction services team has experience providing both financial and tax due diligence for search funds. Additionally, we give general transaction advice, including on the Share Purchase Agreement and completion mechanism. We help searchers get what they expect and pay a fair price, while minimising risks and maximising returns.

Our due diligence involves:

  • Thoroughly evaluating the target’s historical financial performance to identify the business’s true underlying profitability.
  • Identifying the key profit drivers and evaluating the forecast performance.
  • Analysing the balance sheet to identify cash/debt balances and normalised working capital, including any off-balance sheet items.
  • Identifying potential tax risks.
  • Recommending how to protect against financial or tax-related risks.

Get in touch to see how our team can help you with your transaction.

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