Search Investment Group (SIG) recently published a study on Self-Funded Searchers, sharing information and insights on the self-funded acquisition process, whereby an entrepreneur buys a small business acquisition using searcher capital, SBA loans, and investor support.
The study reported data from a survey of 279 searchers across 3 social media platforms. At Private Market Labs, we appreciate opportunities to examine data that shine light on different parts of the small business M&A industry. Here are a few of the most important insights from the SIG study and their implications for our community.
Background and Study Demographics
A core element of the search fund industry is the transfer of enduringly-successful small businesses to a new generation of entrepreneurs. The SIG survey confirms that generational change is happening, and is being driven by Millennials. 58% of all searchers were in their thirties, with the most common age for a searcher to begin their self-funded search being 35, and the mode of the dataset (most common age) was 30.
The median age for all self-funded searchers in the study was 34, and the median age for those who successfully acquired a company was slightly lower, at 32. The fact that relatively young entrepreneurs are enjoying success with this model is evidence of a generational shift. While we expect that Millennials will continue to be the majority of searchers and successful searchers, Private Market Labs is also interested in supporting both Gen Z searchers and older entrepreneurs looking to acquire businesses.
Professionally, the surveyed self-funded searchers came from various backgrounds ranging from operations/management to venture capital. However, one trend was clear: people with sales & marketing backgrounds were more likely to close a deal compared to others. Interestingly, those with accounting and venture capital backgrounds comprised the smallest group of self-funded searchers in the study. In terms of educational background, 63% of searchers had an MBA by the time of their search, which speaks to the continued dominance of MBA programs when it comes to preparing entrepreneurs for this process. As the search fund model becomes more popular and resources mature, we expect the proportion of MBAs in the industry will fall over time.
Data on the Search
We were also interested in survey data around the search process itself, as it clarifies where searchers are spending their time and resources. The process of searching for businesses to acquire can take anywhere from 3 to 18 months. Even pursuing it part-time requires a significant number of hours each week. For searchers with financial limitations, this can be a barrier to entry, though we note that other models, such as the traditional search model and the search fund accelerator model provide up-front capital to support a searcher’s expenses while they look for acquisition opportunities. Interestingly, the self-funded searchers in the study tended to have very broad acquisition criteria, possibly elongating the length of their processes. Only 1/3 of searchers limited their process to 3 or fewer industries, choosing to focus on criteria such as size and location. These results align with our internal conversations with searchers and may reflect the generalist backgrounds of the survey population.
Access to funding was a key factor in the acquisition process beyond the costs of the search alone. More than 75% of searchers had to contribute at least $50,000 of personal funds, even with 62% taking on investors. We believe that identifying ways to pair searchers with investors will expand our industry and lower costs.
The Acquisition Process
As we’ve noted in prior posts, brokered searches are most likely to close. This proves true with the SIG searchers as well. The majority of deal sourcing among surveyed searchers came from brokers and 48% of these transactions happened as a result of direct broker outreach ( as opposed to through an aggregator/broker site). This implies that buyers prefer to get recommendations from brokers within their existing networks and are reaching out based on location, industry specification, or similar methods. It also suggests that buyers are building relationships with brokers, who are then forwarding additional opportunities.
Further along in the process, self-funded searchers in the study submitted a surprisingly-large number of letters of intent (LOIs). This could reflect widespread use of strategies that emphasize signing numerous LOIs despite anecdotal evidence that this method is not preferred by brokers. Alternatively, this data could reflect the importance of running a thorough due diligence process. Either way, the diligence and negotiation parts of the process can be labor-intensive, and there is significant sunk cost to consider with LOIs that do not end up closing.
Finally, a large number of acquired companies were “small”, with more than half of all acquired deals having less than 1M of EBITDA. While this is expected given the reliance of the self-funded search process on SBA financing, which caps the size of the acquisition, it also shows that buyers are willing to compromise on size for the right company.
Self-fund searches prove to be an attractive avenue for both searchers and investors alike, with successful transactions generating strong returns. Following the searches, most maintained positive relationships with sellers and successfully grew revenue through their ownership. Overall, this study provided several key insights regarding self-funded searchers coming from all backgrounds and locations.We look forward to seeing additional studies (and contributing our own insights) in the future!