AN AUSTRALIAN PERSPECTIVE - INTERNATIONAL SEARCH FUNDS
As someone following what I thought was a fairly unique path to entrepreneurship through acquisition in Australia, stumbling across the search fund community a few short months ago felt like a Eureka moment. After reading through the Stanford and Harvard materials, I had finally found a description of what I’d been doing (and trying to convince others was a good idea). I was a search funder!!, or more specifically a self funded searcher.
It was great to be able to put a label on the model and to know there were others treading the same path, using a model that had evolved over more than 30 years with case histories and best practices for reference. I was even more excited when I discovered the support and sharing that is being provided within the search fund community.
For the best part of three years I’ve been searching in Australia for a business to purchase and grow whilst trying to build a quality team of investors and mentors and continuously learn and refine the tools and techniques to implement into the acquired business. The first couple of years I was searching in parallel to a corporate role and the last year full time after saving enough funds.
My strategy of purchasing a business evolved from using my own limited funds (essentially buying a job), to agreeing to partner with two others to pool funds and make a purchase of something a bit bigger (problematic when it came to agreeing roles and responsibilities in a still relatively small business) until landing at the beginning of this year on searching for a larger opportunity that would be attractive to investors to partner with me as the CEO.
Similar to searchers in the US that raise a fund I went about meeting with investors and talking them through the model I was proposing, initially the proposal was a straight 30:70 share based on invested capital in the business. In my search through the many models of aligning investor and CEO interests I had discussions with a range of very helpful and knowledgeable people and worked diligently through the various models to try and identify how to best align the interests of investors and myself. Surprisingly, of all the people I spoke to in the investment community in Australia, I didn't come across any that had heard of a search fund. Quite incredible given what I now know of the history and the ramp up in popularity of the concept in the US.
Stumbling on the Search Fund Concept from Australia
In assembling my team to acquire a business I was introduced to two entrepreneurial guys in a relatively young business buying startup called the Octavian Group. I’d had many discussions about the gap in the Australian market for a buy side practice when I happened to have a discussion with a potential investor who mentioned these guys. Much like finding the search fund community, my excitement turned to rapid action and I was straight on the phone to them and my deal flow, knowledge and ability to execute has increased exponentially since teaming up. Where this becomes relevant is in reading a post by one of the team about entrepreneurship by acquisition. That was a term I hadn’t previously heard of and was ammunition for the google search that lead me to find search funds.
What a journey that has been. Much like the rapid ramp up in deal flow and progress that occurred through finding and teaming with buy side professionals, finding the search fund community, the available resources and helping sharpen my structure and pitch and being able to show a track record of others having done what I’m trying to do (e.g. the Stanford 2016 search fund study) has been incredible helpful.
Australia as an investment Destination
Having spent a large portion of my working life traveling to the UK and a little to the US, I tend to compare and contrast the market in Australia to those and am interested in the trends and market dynamics, with Australia tending to lag on some of the business trends, presenting a number of opportunities.
Also, a great deal of the business books that are available on purchasing businesses tend to be American. In discussions with potential partners and investors and research reports I kept coming across industry multiples that didn’t correlate to what I was seeing in my search. A key difference in valuation in the lower middle market in Australia compared to the US is in the average EBITDA multiples.
In my experience of reviewing many businesses over the past few years, the benchmark when talking with brokers tends to be 3x EBITDA as a starting point (settlement is often lower than this). My reference point to similar businesses in the US is they sell for between 4 and 6x EBITDA. A significant difference on the acquisition. Intuitively you would also expect a similar result on divestment. True if the business remains the same size, however the rule of multiples growing as the earnings grow holds in Australia as is the US. However, there is healthy competition here in the Private equity space as deal flow is not as strong, so the multiples if the business grows to a size for them to be interested or for a public company to get involved are very strong.
Aren’t there enough Investors in Australia, why reach out to the US?
There is no shortage of potential investors in Australia and they are experiencing the same issue as in most other countries around the world. A high stock market, low interest rates and a struggle to get some of the returns they used to. My interest in joining searchfunder.com was:
1) the amazing community of people with an interest in the search fund model in one place so I could learn as much as possible.
2) to be able to connect with people that are working through the same challenges as me; and
3) to test whether there was any appetite for investment in business opportunities in Australia.
My expectation on the first two priorities has been exceeded and from feedback I’ve received there is also an appetite for investment in Australia from the search funder community, which I find very exciting. My interest in adding some US based investors in addition to the business mentoring and their knowledge and comfort with the model is the potential import / export opportunity that the network may also provide.
After reviewing many businesses I’ve so far managed to find two that fit my investment filter and am in negotiations with both. Should these progress, I’d love to send the information to interested investors.
Should anyone wish to reach out to me for any reason, please either message through this platform, or email me at: [redacted]