Investor Question: How do you vet searchers and sponsors?
March 06, 2024
by a searcher from The University of North Carolina at Chapel Hill - Kenan-Flagler Business School in Austin, TX, USA
Investors: How do you vet searchers and sponsors? Outside of issues with the business or sector, what are your biggest deal-breakers with searchers/sponsors?
in Omaha, NE, USA
On the business side, I thoroughly assess key factors such as proven track record, strong financial fundamentals like high margins and cash flow, a defensible competitive position, and opportunities for growth, whether organic or through acquisitions. The industry sector is also critically important – I only pursue opportunities in sectors that I understand well and have a bullish long-term outlook on.
However, I place just as much weight on evaluating the searcher or sponsor themselves. After all, I'm backing the jockey as much as the horse. A demonstrated entrepreneurial mindset, genuine passion for the industry, strong leadership skills, and integrity are paramount. Prior operating experience, whether at the company itself or elsewhere, is essential for me to gain comfort in their ability to successfully run the business post-acquisition.
Some of my biggest deal-breakers when it comes to the individual are any ethical issues or lack of transparency in their background or investment thesis. I won't work with anyone who tries to hide parts of their story – I want to know about any potential skeletons upfront. An overly inflated sense of ego or arrogance is also a red flag – I need partners who are confident yet humble and coachable. Additionally, a lack of true commitment, whether financial or personal, makes me question their dedication to making the business a success over the long haul.
While investment banking or consulting experience can provide valuable financial and analytical skills, I look for individuals with a more well-rounded and diverse set of experiences that go beyond just crunching numbers. I truly value those who have rolled up their sleeves and faced the real-world challenges of running a business head-on. This type of practical, boots-on-the-ground experience is invaluable and cannot be taught in a classroom or learned from a spreadsheet alone.
Ultimately, I'm seeking searchers and sponsors who I can trust implicitly, who have authentic motivations beyond just making money, and who possess the hunger, resilience, and ability to lead the company to new heights. It's as much about the person as it is about the investment opportunity itself. I want individuals who have a genuine passion for entrepreneurship and a clear vision for the type of business they want to create and the impact they want to have.
from University of Alberta in Vancouver, BC, Canada
1. Can the searcher explain why traditional Search and how is Searcher going to acquire a company? It is crucial that Searcher demonstrate a clear understanding of traditional Search and why Searcher is best suited instead of working for someone else.
2. How committed is the searcher to acquiring and running a business? They should display a strong dedication to the endeavor, as it often requires significant time and effort.
3. Does the searcher have a reasonable plan and realistic expectations? They should be able to sit down with a business owner, negotiate a deal, and navigate the complexities of the acquisition process.
For a self-funded searcher or at the LOI stage, I evaluate both the business and the searcher separately and then assess whether the searcher is a good fit to run this business. Here are some specifics I look for:
1. Due Diligence: Carefully review and question the searcher on their due diligence of the business. They should have conducted a thorough analysis and be able to discuss their findings in detail.
2. Organization and Communication: How organized is the searcher? Will they be able to effectively communicate with employees, customers, and investors? Strong organizational and communication skills are key to successful business management.
3. Work Ethic: Is the searcher prepared to be a “jack of all trades” and put in the necessary hours, including weekends, to get the job done? Owning a small business often requires a flexible schedule and a willingness to take on a variety of tasks.
4. Industry Knowledge / Experience: Does the searcher have experience within the business’s industry? This can be a significant advantage when it comes to understanding the market.