Types of Businesses people look for

April 17, 2019

by a searcher from Harvard University in New York, NY, USA

The more I talk to people who are involved in search funds, the more I find that everyone is obsessed with finding the canonical "enduring niche" companies that are written about in all the search fund material.

However, the more I do my search (mostly via brokered listings), the more I find the "boring", "low end" businesses like car washes and laundromats to be extremely attractive.

Am I the only who loves car washes and like, Dunkin Donuts franchises? Why do everyone else ignore them? Am I overlooking a massive potential pitfall here?

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Reply by an investor
from University of California, Berkeley in Moorestown, NJ 08057, USA

One last comment - I hear a lot of searchers talk about adding value by "tuck-in" acquisitions. With Alex Sloane as a shining example, if you find the right franchisor that supports/encourages multiple unit ownership (note, not all do) you can build quite a sizable business by acquiring units as they come on the market. They are usually offered to other franchisees of the same chain before they go to the public market, and in any case you will have the names and addresses of every franchisee and can contact them directly. And the bigger you get as a franchisee the more influence you can have over how you run your business. But you have to deal with "corporate" which is what a lot of searchers are probably trying to avoid. PS - you can see the "Franchise Disclosure Document" for just about any franchise on the State of California's website https://docqnet.dbo.ca.gov/. Any franchise that does business in CA has to post their FDD to this site yearly and it's publicly available.

Reply by a searcher
from Ivey Business School at Western University in Toronto, ON, Canada

Agreed with comments above. That being said, the franchise based search fund seems to have been executed in the past with Burger Kings. There was even an HBS case created about this (https://hbr.org/product/cambridge-franchise-partners/###-###-#### PDF-ENG).

"With over 80 locations, he and his partners have very quickly built a business with $500m in revenue, and $80m in profit. He is undoubtedly highly leveraged (to be fair, he didn’t say), but nevertheless the result is impressive. Depending on debt, his company could easily be worth $300m." (from https://www.realfinanceguy.com/home/2019/1/12/search-fund-conference)

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