Searching, as it sounds, is about finding a company that you will run as CEO. You will spend your time learning about new industries and talking with CEOs/owners. Your goal is to convince one owner to sell their business.
Searching is a daily battle of will and commitment; but it's also a proven, viable approach that works. The 2018 Stanford Search Fund Study shows that 69 percent of search funds acquire a company. The odds are in your favor, and there are steps you can take to increase them further.
First, industry searches maximize your short-term and long-term odds of success. In the short-run, every conversation with an industry expert, visit to a trade show, or meeting with an owner is additive. You grow more competent and credible in the industry, which will help you build trust with your eventual seller. Over the long-run, the industry will be the biggest determinant of your success. The larger and faster growing the industry, the more opportunity there is for you to build a great company.
Second, a bias towards action is critical. You are unlikely to buy a company by analyzing from your office. You buy a company by getting face-to-face with owners on a regular basis. A former searcher once said to his investors: "The competitive advantage of the Search Fund model is: 1) the entrepreneurial story; and 2) the willingness to travel quickly."
We understand the search, its risks, and the specific actions you can take to maximize your odds of buying a good company in a good industry.
Generally, you are searching for a high-quality business with the following characteristics:
- Simple Operations
- History of profits and growth
- Services (Either B2B or B2C)
- EBITDA Margins > 15%
- EBITDA of at least $2m ($2-4m target)
- 60%+ Contractual Recurring Revenue
- Low Maintenance Capex
- Industry Growth of at least 2x GDP
These characteristics mitigate the operating risk and will allow you flexibility and breathing room as you learn how to operate a business. Additionally, experienced and successful operators and investors will join your board of directors to help you take the already high quality business to even greater heights.