5 reasons a business owner would sell to a search fund entrepreneur
While selling to a search fund entrepreneur is not the correct succession solution for every business, it can be a great option for many aspiring sellers. The model has a track record of hundreds of successful acquisitions, and here are a few of the reasons for that success:
1) Story
“I get lots of emails about selling my business, but I decided to respond to yours because I thought, ‘Huh, this is different.”
Searchers often receive a variation of this reply to their outreach to business owners, who can be quite accustomed to receiving inquiries from various parties about selling their business.
Business brokers want to get a listing.
Corporate advisors and consultants want to be hired to optimize profitability and develop a succession plan.
Wealth managers want the mandate to care for the business owner’s personal wealth, both now and after they (fingers crossed) sell.
Private equity groups want to enhance their portfolio.
Competitors want to consolidate through M&A.
Rarely, however, do they hear from an entrepreneur who wants to buy a business to operate herself, and therein lies the power of the search fund entrepreneur’s approach.
I am looking for a business that I can buy and I can run for a long time, because I’m dying to run a business of my own.
This message stands out from the crowd and elicits a response from a business owner who has ever considered finding a successor.
2) Intent
Once in while a business owner will tell us, very bluntly, that she doesn’t care what happens to the company after she sells; her sole objective is to take home as much money as possible from the sale.
Much more often, the business owner recounts in detail how and why she cares about the business, its customers, its employees, its brand, and its legacy. For the retiring business owner, these things matter a great deal. If she has spent the past 15-30 years (or more) building and caring for this business, her identity is closely wrapped up in it.
When a competitor makes a buyout offer, the would-be seller often sees more than just dollar signs. Instead she sees:
A long-time enemy walking in her front door and rearranging the furniture,
The demise or disappearance of a brand she has worked so diligently to build and protect,
The culling of her trusted employees, many of whom will be deemed redundant, and
The surrender of her customers, who have put their faith in her and her business, to a competitor they had chosen not to buy from.
When a typical private equity group makes an approach, the business owner sees:
An industry outsider banker type adding another feather to the cap,
A new boss she must report to for the duration of her earnout period, when she hasn’t had a boss for years, and
Similarly to the competitor, a potential loss of brand, legacy, and employees as the company is merged into the buyer’s portfolio.
When a searcher gets the messaging right, she can differentiate her intent from all of the above. She wants to buy a solid business that she can step in and run full-time for years to come, taking the strong base built by the seller and adding to it. She has no immediate intention to rebrand, relocate, or cull. Plus, the seller can usually be on her merry way within a few months of closing.
Listen for the sigh of relief.
3) Relationship
Rightly or wrongly, many business owners would ideally like to pass their business to their children. Sometimes this doesn’t pan out for any of the following reasons:
They don’t have children.
The children don’t want to take over the business.
The children aren’t capable of taking over the business.
Any of the above can leave a gaping hole in the business owner’s succession plan. It’s unsurprising, thereofore, that in a search fund deal the seller and buyer often develop what amounts to a surrogate parent-child relationship.
The seller sees in the searcher the child they never had and, simultaneously, themselves once upon a time. The former can develop into a near-familial tie and the latter would get Freud in a tizzy.
This initial connection can grow, when managed appropriately, into a productive mentor-mentee relationship, and even at times a friendship. But even before then, it can at least facilitate a smooth deal.
4) Confidentiality
First a story.
In my real estate days, I once represented a building in Chelsea, NY. The building had some units for rent, and I hung a sign off the side of the building in full view of Seventh Avenue. I was proud to have hung that sign, and the phone calls came flooding in.
But amongst the calls from hopeful buyers and renters was one less pleasant call from the owner of the cafe on the ground floor of that building. As politely as he could, this gentleman demanded I remove the sign, because “When people think you’re selling the building, it’s the kiss of death for your business.” This call was shortly followed by another disgruntled call from the building’s owner, and thus concludes the story of the shortest-lived real estate sign in New York history.
In the search fund context, the mentality of the business owner is not dissimilar to that of the cafe owner in my story. That is, when you begin actively soliciting takeover bids, you potentially incur a number of new risks:
Customers stop entrusting their future business with you.
Competitors use the knowledge that you’re selling to their competitive advantage.
Employees get scared and begin exploring alternative job prospects.
The company’s performance declines as time is taken away from operating the business effectively to prepare the business for sale and field, evaluate, and negotiate offers.
Doing a deal with a searcher, or any buyer that arose without putting the company on the market, means the entire process stays between the seller and the searcher until that moment when both parties choose to announce the transition, enabling a more timely, better-crafted message to all stakeholders.
5) Cost
Depending on the size of the business and market norms, the broker’s fee can be 5-10% of the final purchase price. Having spent many years of blood, sweat, and tears building every one percent of that business, the seller can find that fee a hard pill to swallow.
6) The only option
Admittedly not the most glamorous reason to sell to a searcher, the lack of alternative options is also not an uncommon driver. While plenty of business owners believe any buyer would be lucky to pay ∞x EBITDA for their business, the reality is that in many markets there are far fewer buyers than targets, and many of these hopeful sellers will end up simply closing shop.
