Hope everyone had a happy #july4th! For today's #smb thread, I'm sharing some insights from a recent piece we published on the Private Market Labs website about how your search strategy impacts your search costs. Here we go:

Traditional Search:

  1. With this model, prospective buyers partner with investors or a group of investors to fund the search process and eventual acquisition. While this path involves giving up a portion of the equity in the target business, it offers financial advantages.

  2. Traditional searchers often receive a salary to cover their living expenses, reducing immediate financial risk defraying search costs. The arrangement allows searchers to dedicate their attention to the finding a business, rather than splitting time with other work.

  3. This approach is favored by those who prefer the security of a steady income stream and the backing of experienced investors, who can also provide valuable mentorship, industry connections, and advice.

  4. It can however come with additional limitations - you'll need your investors to sign off on your acquisition, and you may need to acquire a larger business in an industry that fits your investor preferences, even if you find something else you like personally.

  5. Additionally, finding traditional search fund investors can be competitive - top investors will recruit at highly-ranked business schools while other searchers may struggle to get the attention of this kind of investor without substantial networking.

Self- Funded Search:

  1. This approach provides autonomy and a higher degree of ownership over the acquired business but requires a significant personal financial commitment, including small business due diligence expenses.

  2. A self-funded search can be more time-consuming as it typically does not include institutional support from experienced experts and self-funded searchers need to ensure they can cover living expenses through other means.

  3. This means that all search costs, such as sourcing potential businesses, legal fees, and due diligence expenses are the responsibility of the searcher. This process can be lengthy and costly, necessitating careful planning (or a very supportive partner).

  4. Despite the challenges, the self-funded strategy offers long-term benefits. Retaining a larger proportion of future profits generated by the business and having full control over decisions can be appealing to those with a clear vision for their venture.

  5. Self-funded searchers also face fewer constraints when it comes to the business they acquire because they are not beholden to the needs of their long-term investors.