Developing a sound strategy to finance a business acquisition, especially when dealing with search funds, can be just as crucial as the initial search process. To shed some light on this process, we examined best practices for working with search fund investors on Private Market Insights, guided by prolific investor Saumil Jariwala, Founder of Feta Fund.
Saumil has been active in the search funds industry since 2016, beginning with Trilogy Search Partners before embarking on his ambitious journey with Feta Fund. His goal with Feta Fund is to invest in a thousand search funds. Feta is an acronym for “Founder-focused Entrepreneurship Through Acquisition” and it accurately encapsulates the essence of our conversation today.
The conversation with Saumil centered around the pivotal role of investors in the search funds ecosystem. He shared insights on identifying potential investors, building sustainable relationships, and launching your own journey into search fund investment.
You can read the main take-aways below or watch the full conversation here:
Investing in Search Funds: Saumil’s Vision
At a macro level, Saumil began investing in search funds based on ongoing demographic trends, specifically the generational shift in small business ownership taking place with the retirement of leaders in the baby boomer generation. With nearly half of small businesses owned by people over the age of 55, Saumil views the successful transfer of millions of businesses as being essential to the American economy.
Saumil sees search funds as a comprehensive threefold solution: they provide appealing returns for investors, potential CEO roles for entrepreneurs, and crucially, ensure the preservation of successful small businesses. Saumil’s investment approach is to maintain an industry-neutral stance, emphasizing the goal of identifying ‘diamonds in the rough’ – exceptional businesses valued at $10 to $25 million with the potential to grow exponentially. These businesses, although often challenged in unique ways, are have the potential to expand, adding value to their communities, employees, leaders, and shareholders.
Saumil selected his segment of the market strategically – larger deals typically raise from different kinds of investors, while smaller deals often have a higher risk profile than Saumil would prefer. He highlights two primary risks associated with acquiring businesses valued less than $10 million: 1) smaller companies often face a more uncertain future – size and scale create safety to maneuver for entrepreneurs; and 2) the risk that owners of very small businesses are selling “vaporware”, which he defines as businesses fully built on the charisma or talent of an exceptional founder, but are not structured to survive after their departure.
Saumil prefers to position himself as a minority investor, appreciating the collective wisdom and support from a diverse group of investors. He encourages rigorous examination of potential investments, ensuring that the business’s value stems from its model rather than the owner’s charm or connections.
When it comes to structure, his preference aligns towards making equity investments, where he feels his strategy can provide value to the community. While the SBA 7(a) program provides a simple method to raise debt for smaller deals, raising equity in his preferred size range can still be a challenge for searchers.
The Power of Talent in Search Funds
In the world of search funds, Saumil firmly believes that the talent of the searcher/acquirer is more important than industry, business model or valuation. With over 50 searchers under his belt, Saumil has witnessed the transformative impact of having the right individuals in charge. He prefers to have a hands on approach to supporting searchers, investing primarily in “traditional” searches where the buyer takes a salary while looking for an acquisition and receives support and mentorship from a close group of advisors, Saumil included. Saumil prefers this configuration because it allows him to leverage his experience and provide guidance to aspiring CEOs on their quest for success.
For aspiring searchers seeking to secure investment, Saumil highlights the importance of passion, determination, and resilience as key traits of a successful searcher.He believes that these intrinsic qualities of an individual’s character and personality are more important than pedigree or resume credentials when it comes to selecting winners in the challenging search fund landscape.
Saumil prefers to cultivate relationships with searchers for a minimum of six months before committing investment capital. This allows him to meticulously assess a searcher’s ability to manage the process successfully. Moreover, he finds great promise in searchers who display a remarkable ability to swiftly adapt to professional advice, even if they may lack prior experience.
It’s not about the asset, it’s not about the company, it’s really about the person.
Saumil Jariwala
When it comes to prospective search fund investors, Saumil emphasizes the importance of making a positive contribution to the searchers’ journey. In a thriving search ecosystem, value-additive investors enjoy staying power and the endorsement of their peers. By actively assisting searchers, investors become instrumental in creating a cycle of collaboration and growth.
Top 5 Recommendations for Buyers Looking for Investment
Choose the Right Business Value Range: Saumil recommends focusing on businesses in the $10 to $25 million range. He believes businesses valued below $10 million can be riskier due to early-stage development challenges and the possibility of being sold unsustainable businesses by charismatic owners.
Focus on the Individual, Not Just the Business: Saumil underscores the paramount importance of focusing on the person rather than the asset or company. The fit between the company and the searcher is crucial – a mismatch can lead to dissatisfaction, even if the business sees growth.
Cultivate Resilience and Risk Tolerance: Saumil notes the unpredictable nature of the search fund world, with its rollercoaster-like ups and downs. To navigate this successfully, resilience and a high risk tolerance are essential qualities.
Strategic Planning and Quality Revenue: Saumil suggests that buyers should have a clear exit strategy in place and focus on the quality of revenue. He emphasizes the importance of recurring and consistent revenue streams, which make businesses more attractive to investors.
Long-term Growth Focus and Alignment with CEO: When considering long-term investment strategies like holding companies, Saumil advises buyers to focus on long-term growth and potential. Moreover, aligning with the company’s CEO, whose decisions often shape the business’s trajectory, is essential.
Different Strategies for Search Funds
The realm of search funds encompasses a range of strategies, each with its own logistical considerations, potential rewards, and earning perspectives. Long-term holds stand out as a preferred investment strategy for Saumil, as he emphasizes the importance of long-term growth. However, he highlights the significance of aligning with the CEO’s vision for the business as an investor, because the searcher will ultimately shape the trajectory of the business.
Acknowledging the evolving landscape of search funds, Saumil points out the current trend of first-time searchers successfully running companies worth $50 million or more at the point of acquisition. This shift signifies a departure from the traditional focus on “diamond in the rough” companies, potentially placing search funds in direct competition with private equity firms for larger acquisitions.
When it comes to sponsored search funds, Saumil notes that if a single investor owns 100% of the fund, it can introduce an employer-employee dynamic that may conflict with the searcher’s entrepreneurial aspirations.
The relationship you have with that investor who owns a hundred percent of your search fund feels a lot more like an employer-employee relationship.
Saumil Jariwala
Regarding searcher compensation, Saumil provides insights into the typical salary structure during the search phase and the post-acquisition phase. In the search phase, salaries generally range from $120,000 to $130,000 per year, without a bonus. However, after acquiring a business, the base salary increases to approximately $180,000 per year, with a bonus ranging from 25% to 30% on top of that.
In conclusion, Saumil envisions an exciting future for the search funds industry, characterized by continuous evolution, expansion, and adaptability. He emphasizes that success in search funds relies more on individual attributes such as determination, resilience, and a willingness to learn, rather than age or resume alone.