How to Set Up the Search Fund Process: A Step-by-Step Guide

The search phase of a search fund is crucial to finding and acquiring a profitable business. It involves a blend of strategy, organization, and persistence. However, while process and structure are important, flexibility and opportunism can also play a pivotal role in your success. This guide will walk you through how to set up the search process, emphasizing both discipline and adaptability, and the importance of setting ambitious goals to maximize your chances of finding the right business.

1. Define Your Search Criteria

Before diving into the search, clearly define your search criteria to guide your focus. This will help you target businesses that are aligned with your goals, while also giving you the framework to evaluate opportunities efficiently.

Key elements of your search criteria should include:

• Industry Focus: Identify the industries you’re targeting, but remain open to opportunities in other sectors that could provide strong returns.

• Company Size: Define the size of businesses you’re interested in, usually based on revenue or EBITDA. Search fund targets generally range between €5 million and €30 million in annual revenue.

• Geography: Select the regions where you’re willing to acquire a business, considering both lifestyle and the business climate in those areas.

• Ownership and Exit Plans: Focus on businesses where the owners are motivated to sell due to retirement, succession planning, or lifestyle changes, which can increase your chances of successful negotiations.

By establishing these criteria early on, you’ll save time and effort by narrowing your search to the most promising opportunities.

2. Be Opportunistic

While it’s essential to have a structured search process, don’t forget to remain opportunistic. Great opportunities can sometimes fall outside your original plan, and it’s important to stay open-minded when evaluating deals. Flexibility and responsiveness to unexpected opportunities can often lead to high-reward acquisitions.

• Stay Open to “Off-Criteria” Deals: You might come across businesses that don’t perfectly fit your pre-set criteria, but present strong value due to factors like growth potential, market leadership, or pricing. Be willing to adjust your criteria or consider unique circumstances when such opportunities arise.

• Act Quickly on Good Opportunities: In some cases, time is of the essence. If a high-potential business becomes available, be prepared to move quickly, even if it requires temporarily sidelining less promising prospects.

• Leverage Your Network: By regularly checking in with your network of investors, advisors, and contacts, you may discover off-market opportunities that aren’t actively being marketed but are prime for acquisition.

3. Build a Robust Deal Flow Pipeline

Deal flow refers to the volume and quality of acquisition opportunities that come your way. A robust deal flow is key to finding the right company to acquire. To ensure you have enough options, focus on generating both proprietary and brokered deal flow.

Proprietary Deal Flow

Proprietary deals are sourced directly from business owners, offering more control and less competition compared to brokered deals. Here’s how to build your proprietary deal flow:

• Direct Outreach: Reach out to business owners directly via email, phone, or LinkedIn. Personalized communication can make a significant difference, especially if you articulate why their business interests you.

• Networking and Referrals: Leverage your professional and personal network to generate leads. Word-of-mouth referrals often lead to higher-quality deals.

• Join Business Groups: Attend industry events, local business groups, or trade associations to meet business owners directly. These personal connections can yield exclusive acquisition opportunities.

Brokered Deal Flow

While proprietary deals are ideal, don’t ignore brokered opportunities. Brokered deals are listed by intermediaries, but they can still be valuable, especially early in the search process.

• Build Relationships with Brokers: Establish rapport with brokers who specialize in small to mid-sized companies. Brokers can provide you with a steady stream of leads that fit your acquisition criteria.

• Utilize Online Platforms: Search business-for-sale websites, such as BizBuySell and Axial. Although these platforms are competitive, they give you exposure to a wide range of businesses for sale.

4. Set Ambitious Search Goals

To drive your search forward and keep yourself accountable, it’s important to set ambitious, measurable goals. These goals should focus on generating high-quality leads and submitting multiple Letters of Intent (LOIs).

• Target High-Volume LOIs: Aim to submit a certain number of high-quality LOIs per week. For example, set a goal of submitting 5 LOIs weekly. By setting this ambitious target, you force yourself to maintain a high pace, continually engaging with business owners and pushing deals through the pipeline.

• Quality Over Quantity: While the goal is to generate multiple LOIs, ensure you’re not sacrificing quality. The LOIs should target businesses that meet your growth and profitability benchmarks.

• Track Key Metrics: Keep track of your deal flow metrics—how many businesses you’ve contacted, how many follow-ups you’ve done, and the number of LOIs submitted. By monitoring these metrics, you’ll know when to ramp up your efforts or adjust your approach.

5. Organize Your Search Process

A systematic approach will help you stay on top of multiple leads and ensure you’re tracking progress effectively. Here’s how to stay organized during your search:

• Use a CRM Tool: Customer relationship management (CRM) software like HubSpot, Pipedrive, or Salesforce can help you organize interactions with business owners, follow-ups, and track deal stages.

• Track Deals by Stage: Organize your deal flow by stages—initial outreach, signed NDA, first conversation, due diligence, LOI submission, etc. This helps you prioritize and move deals forward.

• Stay Consistent with Follow-Ups: Persistence is key. Ensure that you have regular touchpoints with business owners to keep the conversation moving.

6. Screen Deals Efficiently

Not all deals will be worth pursuing. Efficient screening is crucial to ensure you focus on the best opportunities.

• Initial Screen: Quickly assess whether a deal meets your basic criteria (industry, geography, revenue, EBITDA). If it doesn’t meet your minimum thresholds, move on.

• Financial Health: Review the company's key financials, like profitability, cash flow, and debt levels. Businesses with stable, predictable cash flows are prime targets for acquisition.

• Seller Motivation: Determine the seller’s reason for selling. Motivated sellers, especially those planning for retirement or seeking a succession plan, may be more willing to negotiate favorable terms.

7. Conduct Thorough Due Diligence

Once you have found a promising target, it’s essential to conduct due diligence to confirm that the business is a sound investment.

• Financial Due Diligence: Verify the accuracy of financial statements and analyze cash flow, debt, and profitability.

• Operational Due Diligence: Review the business’s day-to-day operations. Are the systems scalable? What is the operational efficiency?

• Market Due Diligence: Assess the company's position in the market, its competition, and growth opportunities.

• Legal Due Diligence: Check for any pending legal issues or regulatory challenges.

8. Develop a Post-Acquisition Plan

A key part of your pitch to investors (and a critical aspect of your success post-acquisition) is having a clear post-acquisition plan. This plan will outline how you’ll improve operations, grow the business, and generate returns for your investors.

• Operational Improvements: Identify immediate changes you can make to improve efficiency, reduce costs, or optimize processes.

• Growth Strategy: Develop a strategy for growing the business, whether through organic growth, geographic expansion, new products, or services.

• Leadership and Team: Assess the management team and talent within the business. Determine whether changes need to be made to the leadership structure.

9. Leverage Advisors and Investors

Throughout the search process, your investors and advisors can provide valuable guidance. Regularly check in with them to get feedback on potential deals, due diligence findings, or strategic considerations.

• Investor Check-ins: Keep investors updated on your progress and seek their advice on important decisions. Their expertise can help you avoid common pitfalls.

• Build an Advisory Team: Assemble a group of advisors who can assist with specific aspects of the search, such as legal, financial, and operational due diligence.

Conclusion

Setting up the search process for a search fund requires a mix of structured planning and opportunistic flexibility. By defining clear search criteria, building a robust deal pipeline, setting ambitious goals like targeting 5 LOIs per week, and remaining opportunistic when great opportunities arise, you will maximize your chances of success. Organization, persistence, and leveraging the expertise of your advisors and investors will further strengthen your approach. With the right process in place, you’ll be well-positioned to find and acquire a business that matches your entrepreneurial vision.