Anyone focusing on why so many search funds fail to acquire or profit?

October 20, 2021

by a professional from University of Southern California - Marshall School of Business in North Palm Beach, FL, USA

The 2020 Stanford Search Fund Study reports a 33% failure (to complete a transaction) rate. And, of those search funds that bought a business, 25% suffered losses from their investment.

Self-funders, in contrast, quit or fail to buy more often than search funders, according to my observations and interactions with brokers and advisors.

• You have to wonder why so many people begin something destined to fail, don’t you?

Perhaps the better success rate of search funds pertains to the quality of the investors, providing oversight, and sufficient capital to assure positive cash flow.

You can increase the probability of doing a deal if you know more about how to handle the kind of due diligence that occurs before LOIs. You're invited to attend my small group Oct. 6 Zoom Q&A: How Pre-LOI Due Diligence Can Crater Deals. It's on the Searchfunder.com calendar but please use this link now if you want to attend, and be able to submit questions prior to it. https://us02web.zoom.us/meeting/register/tZIpcu-urTwqGdPWOEZLBC1K8KXPTikQal3d

Reply by a searcher
from Duquesne University in Pittsburgh, PA, USA

Thanks for the very relevant question ^redacted‌. I believe, many matured searchers/funds are proficient in decision making, and they are profitable. However, these are the top 5 main reasons for failure: 1) Outsized fear of customer concentration - not understanding that customers can be local/territorial. 2) Not understanding that majority of the investable/growing businesses will never have an ARR, and are not concerned with that. 3) Narrow focus on revenue and EBITDA. - not interested in starting small. 4) Fear due to lack of understanding of the growth opportunity, market drivers/trends and financials. 5) Feeling handicapped due to lack of industry knowledge and experience. Wait, there are more . . .

Thank you ^redacted‌ and ^redacted‌ for great insights. The answer may lie in a model that is fare to a seller and less stressful for everyone involved. In the beginning searchers could focus on deals which are easier,. This could mean smaller deals, letting a seller take a minority equity stake in the acquired business, and letting an empowered/re-energized seller and their current team run the business (minimum disruption to the business) with the new CEO for at least 1 to 2 years

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