How to assemble a board for your search fund deal

You’ve found a company to buy, and part of the diligence process is assembling a kick-ass board of directors. Most search fund boards are relatively small - 3 to 5 people, including the searcher herself. But choosing 2-4 people from a pool of 10-20 investors and the broader community of hundreds of search fund investors and thousands of other potential candidates can be daunting.

When assembling your board, consider the following:

1. Bandwidth

2. Geography

3. Expertise

4. Experience

5. Relationship

6. Politics

Bandwidth

Technical definitions aside, the board of directors in a search fund context exists primarily to hold the CEO accountable on behalf of stakeholders, but also to provide guidance, coaching, and mentorship to that CEO throughout the process.

Both are important, and both require a time investment.

Whereas you don’t need all of your shareholders to invest much time and energy into you (a few will do), your board of directors is different. Each board member should ideally be eager and willing to give you time, advice, and attention. And if you need help, the best board members will pitch in - either connecting you with the right people or picking up shovels themselves.

When you step into that CEO role, you’re going to feel lonely. It’s a lonely job! The board should comprise people you feel comfortable turning to when in need, to have discussions you can’t have with your employees, and who want you to succeed. If a board director is on 50 other boards and running her own business, it will be tough to do her job well.

Geography

In today’s world of virtual collaboration, you might think it strange that I mention geography as an important consideration. Heck, I sit in Singapore while our searchers operate in Australia.

But time zones are a bitch.

A searcher in Taipei is going to have difficulty developing and maintaining a productive relationship with a board member in Boston. Scheduling is difficult, and you therefore just won’t speak as often. 

Also, if that director in Boston isn’t spending much time in the Taiwanese market, her market knowledge will be weaker than that of an equally competent director in Taipei (or even Tokyo, Shanghai, or Singapore), and it will be more difficult for her to deliver targeted value.

But closer ≠ better here; proximity isn’t the only variable.

Expertise

At some point in your diligence it may become clear that your deal could benefit from some industry or functional expertise on your board. Perhaps you’re buying a SaaS company and could benefit from someone who has run a SaaS company before. Or maybe the opportunity lies in really scaling the salesforce, so you could use someone who has done that before.

If the ideal industry or functional expertise doesn’t exist within your investor group, or at least not with investors that check enough of the other boxes on this list, you may need to look outside for that expertise. If you find it, your other investors should be happy to make room for this person by either remunerating her, inviting her to be an investor, or both.

This, by the way, is why we don’t assemble the board before identifying the opportunity and deeply understanding that opportunity. It’s a game of matchmaking.

Experience

I’ve heard of long-time search fund investors demanding to see other long-time search fund investors on a board before they decide to invest in a deal. They place a great deal of importance on prior experience as search fund board members.

I get it. People with prior experience sitting on search fund boards bring a few benefits:

1. They’re known entities, often ones who have in the past worked directly with other investors on the cap table, which reduces the risk of the unknown.

2. They know how and when to add value as a board member in a search fund context.

3. They are theoretically patient enough to work with the searcher, who is in many cases a first-time CEO.

However, I would argue that demanding a lot of prior search fund board experience is an oversimplification of the requirements to be a successful search fund board member. It’s a proxy for what investors want, much like a Harvard MBA - Harvard MBAs are likely to be smart, but there are many more smart people in the world that didn’t go to Harvard. 

Similarly, search fund investors are often capable board members, but there are many more capable board members that have no experience with search funds. As long as the board member checks enough of the boxes on this list, knows how to add value as a board member, and is patient, you should be good to go.

Relationship

A searcher came to me the other day to discuss board composition, and she asked whether she should be concerned that she didn’t know one of the prospective board members very well.

My answer: yes.

One of the largest benefits of the search fund model, and one of the most underexploited, is the opportunity for the searcher and her investors to develop a working relationship during the search phase, when the stakes are low, before millions of dollars are on the table.

If the searcher fails to develop these relationships during the search phase, then come deal time she will be forced to assemble a board from a group of people she doesn’t really know and with whom she hasn’t established a rhythm of communication and work. The risk here is that the underdeveloped relationship turns sour under the stress of doing the deal and operating the acquired business. 

Years ago I was working on a deal in which an investor with whom I had failed to build a good relationship was set to become not only the largest shareholder but also the point person on the board. The deal fell apart, which looking back was a blessing in disguise, because my relationship with this investor would have resulted in a toxic collaboration from the outset.

By contrast, if that searcher-investor relationship is actively worked on during the search phase, it will be fairly obvious come deal time which investors have the strongest working relationship with the searcher, and which are eager and likely to bring value post-acquisition.

Similarly, the searcher should be allocating time to maintaining relationships with people outside the investor group, particularly in her industry or industries of focus, just in case the deal merits welcoming an outside director onto the board. 

Time, you say? What time? Sorry, truth hurts.

Politics

As much as I hate to admit it, politics do play a role in assembling a board. Larger investors may demand (or very strongly request) a board seat. Or a couple of your prospective board members may not like each other very much… or may like each other a bit too much.

Once I saw a prospective search-phase investor make her commitment conditional upon her buddy having a guaranteed board seat post-acquisition. Despite her deep admiration for both the investor and her buddy, the searcher politely declined.

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Start the board discussion early, even when raising your search capital. Take inventory of investors’ appetites, preferences, bandwidth, and areas of interest and expertise. Doing your homework and building those relationships as you go will make the process of assembling a board much easier come deal time. Though it is often not technically your decision who sits on the board (often a shareholder decision), it’s your job to drive the process. Don’t let that take you by surprise.