I love the search fund model both as an investor and for the opportunity it provides young, smart, aggressive executives. To me, it makes way more sense—both as an investor and as a recent MBA graduate looking to buy an existing profitable company—than rolling the dice on some technology start-up chasing the dream of becoming the next Facebook. If we collectively buy a good company, all involved start from a position of having clear downside protection with an upside of 35% IRR and beyond. Also, the searcher has significant equity in an asset of true value rather than magical VC value that can easily be wiped out if things go poorly and depend, even in the best-case scenario, on the funding merry-go-round.

All of that being said, the skills required to buy a search fund company and those required to run and grow it are profoundly different. To succeed as a search fund executive requires being great at both buying and running a company and making a seamless transition from one role to the other. I’ve had a handful of searchers going through that transition recently, so it’s top of mind in terms of what’s required. 

Raising the initial search capital requires an ability to put a plausible plan on paper and articulate your background and industry focus in a compelling way. From there, sourcing the right company to acquire is all about effectively becoming a mini private equity shop. I’ve seen searchers, who either worked for a private equity firm before business school or worked in private equity and never went to business school, particularly adept at creating a robust sourcing machine utilizing tons of free interns and sophisticated email outreach automation and maximizing the use of industry trade shows. Beyond deal flow, the challenge is narrowing the search to a compelling industry niche. For that, I’ve noticed that searchers with a management consulting background are particularly strong at doing the basic research required to uncover good segments to focus on.

Closing the right deal requires deal-making skills. The searcher needs to build a strong relationship with the seller, which often allows the searcher to propose terms that are superior for the search investors than the seller might be able to command on the open market. Finally, the searcher has to be able to present the signed deal to investors in a compelling fashion to raise debt financings and, generally, five to ten million dollars of equity capital. Even if the search investors are mostly supportive, they are not going to invest the big money unless they believe in the prospects of the target company. The searcher needs to have outside capital lined up as a backup to insure getting to a close.

Don’t get me wrong; all of the above is a ton of hard work. Seventy-five percent of searchers end up acquiring a company, so it is not impossible by any means, but it is still challenging. However, in reality, the real work starts the day you get the keys to the castle. Nothing that a searcher has done up until that day prepares them for becoming CEO of the company they have just acquired. The ultimate success (or failure) of the searcher depends less on finding the perfect company, and squeezing the last penny out of the purchase price, than it does on the quality of his or her leadership.

A big part of my favoring the search fund model for young executives over the start-up dream is that on day one they are put in charge of a real business with on the order of 50 employees, millions in recurring revenue, and strong profitability. However, there’s a kind of truth serum that gets administered when the searcher becomes CEO. The product is patched together, customer service is non-existent, and the incumbent leaders inside the organization have never been exposed to professional management and are unlikely to survive even over the medium term. Most important, every search funder, by definition, has never faced the kinds of leadership challenges they now have staring them in the face as CEO.

Even if common wisdom is to spend the first year learning the business before making any big changes, the question remains if everything appears broken: Searchfunder member

Of course, the answer is everything. Fix the product. Build a real customer success function. Figure out which of the senior people you inherited can actually be trusted, and start recruiting key players into the business. However, my advice is generally to start on the sales function.

The sales process is the most similar to building the robust deal pipeline that initially enabled the searcher to close the acquisition: solid marketing materials, inside sales, sales presentations, and new customer nurturing through the funnel to closed deal. Most companies acquired through the search process have strong recurring revenue in a tight niche where customers are sticky and have little place to go even if the product is broken and customer service/success is poor. Therefore, focus on building the front end of the business.

Even more important is the market feedback that the initial focus on sales will provide you as CEO. Sure, you’ll learn a lot by talking to existing customers (which you should do, too), but true insight about Searchfunder memberto rebuild the product, who you need to hire, and what customer success should look like in the end will come from attempting to sell new customers with the product and team you have on day one.

Success over the long term will depend on your ability to build the right product that rapidly expands your customer base and provide them with the right customer service that keeps them happy and loyal. However, most searchers on day one have little clue exactly what that product should look like. For this reason, investing time and capital on product out of the gate would be wasted beyond anything needed to truly stabilize existing functionality.

A great CEO is often more about personality, intelligence, and instinct than anything else. Buying a company through a search process presents a unique opportunity for young executives to learn, through trial by fire, what really matters in building enterprise value. A good place to start is sales, while keeping all of the other balls in the air until you have the clarity to know how to address them.