How to Prepare for Acquiring Your First Search Fund Company

Entrepreneurship through acquisition is one of the fastest routes to success. You don’t need to foster that killer idea, prove product-market fit, or even find your first customers. By skipping the tougher early stages of building a business, you save time for scaling it and building wealth.

Like a pinwheel, acquiring a company allows you to crank additional momentum without the dead weight of inertia. You forgo the legal and administrative tedium of setting up and earn revenue and profits instantly. Applying your expertise helps drive that income higher.

If the thought of acquiring and running a business motivates you, you’re probably an excellent candidate for a search fund acquisition. In other words, finding investors to fully or partially fund your mission to acquire a profitable startup and make it even more successful.

But before you pitch investors and start searching for an acquisition target, spend at least a few weeks establishing your goals and developing a plan to achieve them. Do you have the skills to scale a business, and are you prepared for your life to change as you take on the challenge?

Acquiring a company gives you instant control over its performance and direction, and while that’s empowering, it’s a lot of pressure. How will you motivate employees, delight customers, and earn returns for your investors? You’ll carry these responsibilities for five years plus.

Also, consider your role during the search and acquisition stages. You might spend months trawling the market for suitable targets, negotiating with founders, and doing due diligence, yet nothing is guaranteed. Around 30 percent of search funders fail to acquire, despite best efforts.

You need to be comfortable with uncertainty and incredibly driven for your search fund acquisition to succeed. But if you prepare well, you’ll emerge on the other side with a thriving business and the potential for long-term financial security and a vast business empire.

Start With Your Goals

It doesn’t matter whether you’re an MBA grad, serial entrepreneur, or if this is to be your first acquisition – you need to set goals. Not vague, nebulous aspirations like acquiring a SaaS business, but concrete, measurable goals that help you define what success looks like.

Your goals always start with you. What’s your background? What do you want to achieve? Do you want to exit in a few years, build lifetime wealth, or run a company for the joy of it? How will a search fund acquisition contribute to your short, medium, and long-term goals?

Running a multimillion-dollar business isn’t something you can do on evenings and weekends. Although it’s critical to have a life, your business will always be in the back of your mind. Involve your loved ones and professional advisors in setting sensible goals and reasonable timelines.

Burnout is real and affects everyone from the front-line employee to the Fortune 500 CEO. How will you maintain your physical and mental wellbeing while searching for a target and then running the business? Ensure your goals reflect your abilities, and you know where to find help.

Define Your Acquisition Search Criteria

To buy your way into entrepreneurship, you need to acquire a company where you’ll add value. Your personal and professional goals, demarcated by your expertise and experience, will help you define a low-risk target. And the more specific your criteria, the easier your search will be.

For example, you might want to acquire a SaaS built on Ruby with a minimum $2 million EBITDA in the B2B email-marketing space. You might not acquire a company with that exact criteria, but you’ll save time if you start granularly and then zoom out during your search.

Generally, startups with low overheads, loyal customers, a well-integrated tech stack, and recurring revenue make better acquisitions. But your acquisition criteria, as well as your goals, should align with those of your investors to encourage them to back your acquisition.

Your offering memorandum (sometimes called a private placement memorandum) for investors must define your search criteria but also your strategy. How will you find startups that match your criteria? How long will it take to finish the search? How will you earn them a return?

Acquisition marketplaces like MicroAcquire have consolidated the acquisition process for speed, efficiency, and transparency. Narrowing your search from thousands of vetted listings and then chatting with founders to acquire a company is quick, easy, and much cheaper than a broker.

But not all founders list on marketplaces nor even know they want to sell. Once you’ve set your sights on a startup, you might then cold-call or cold-email to discuss an acquisition with them. While this opens up your founder pool, it likely involves more work and time, so factor that in.

In any case, once your investors are on board, they may fund your search as well as reserve the right to partially or fully fund your target acquisition. Your offering memorandum should, therefore, present a persuasive plan for finding, acquiring, and growing a target company.

How Far Will You Go to Acquire the Right Business?

You might evaluate a thousand startups during your search, speak to hundreds of founders, and only send a letter of intent (LOI) to under 10. The search alone can take up to 23 months, and in those emotionally fraught final stages, you need to know what aces you have in the hole.

For example, if you present a target to your investors, not all of them will necessarily invest. How will you make up the shortfall? You could ask for seller financing from the founder, obtain non-dilutive financing from a platform like Pipe, or get a bank loan, but all come at a premium.

Alternatively, you could invest your own money or ask friends and family to contribute. These are likely your cheapest financing options, and if it’s your own money you put in, you’ll also qualify for more equity. Organize your toolkit in advance so you can pounce on the right deal.

But what is the right deal? Much of it hinges on your valuation of the business. Without an M&A professional in your corner, you’ll need to learn the standard valuation methods and review material such as multiple reports from past acquisitions to understand what’s fair in the market.

Finally, you’re responsible for verifying and validating all the information the founder shares with you and upon which you base your valuation. Rather than rely on your expertise alone, hire due diligence professionals to help you avoid nasty surprises before it’s too late to resolve them.

How Will You Scale the Business?

Your potential returns as a search fund acquirer are high. Search fund acquirers average a 33.7 percent internal rate of return (IRR) and 6.9x multiple of investment. Earning attractive returns, however, depends on you identifying a high-quality business that aligns with your expertise.

Owner-operators succeed when they possess a skill set the acquisition target currently lacks. For example, some companies lack operational efficiency, a differentiated product, or strong leadership, and if you can fill a gap or fix a problem, you earn a return for your efforts.

Before you start your search, consider what type of company would benefit most from your experience. You might have a broad skill set that you can apply across departments, for example, or maybe you’re a specialist who excels in one or two areas.

You could also find a partner to complement your skill set and widen your pool of acquisition targets. You double your chances of success, but also double your sign-offs. It’s also another person (aside from yourself) you must convince investors is worthy of backing.

As a solopreneur, you gain 20-25 percent equity in the acquiring company, assuming you persuade investors to back you and aren’t doing it alone (where you’d take 100 percent equity). Combine your efforts with another, and you’ll split that equity stake with your co-acquirer.

You can make many of these decisions in advance, when you have time to think them through properly, rather than doing so on-the-fly when the stakes are higher. Your preparation will also impress investors, mitigate risk, and galvanize you for this long but ultimately rewarding road.

Best of luck.

Andrew Gazdecki is a 4x founder with 3x exits, former CRO, and founder of MicroAcquire. Gazdecki has been featured in The New York Times, Forbes Wall Street Journal, Inc. Magazine, and Entrepreneur Magazine, as well as prominent industry blogs such as Mashable, TechCrunch and VentureBeat.