Most studies, articles, and stories about search funds are based on the traditional model. This model requires more work than the others up front. Traditional search involves cold-calling dozens of potential investors until you find enough to finance a salary, office costs, DD costs, etc. In this model, you also need to develop and pitch a private placement memorandum (PPM), which often involves attorneys who charge thousands or tens of thousands of dollars. (They are likely to roll the cost if you agree to use them for your acquisition.) At the time of this article’s writing, most individual Searchers seek to raise between $350k and $600k from investors. That initial capital is rolled into their acquisition with a 50% premium for investors. That means if a Searcher raises $400k for their fund, if they acquire a business their investors will immediately receive $600k of equity; whether or not they provide further investment in the business itself. The Searcher will get 20% to 30% of the equity for meeting all of their targets. It’s typically closer to 20 or 25% at this time. Partnered Searchers will usually get about 30% or 35% (currently closer to 30%) to split between them and fundraise $600k to $1m for their search.
Despite having as many as 20 investors, most Searchers indicate that their relationship is strongest between only 1 or 2 of them. These lead investors might speak with you regularly. The rest might do a call every month, or sometimes just once a quarter or less. Sometimes a couple of the investors are never heard from again after the wire clears! Different Searchers develop different relationships and set different work parameters with their investors and advisers. It's important to talk to other Searchers about their style of work and how they got along with different investors so that you can understand what it might be like for you. You can ask the investors, but why would you? They'll tell you what they think you want to hear. Ask the people who went through what you're about to go through. And don’t ask the Searchers who successfully exited with a 10 times return, either; talk to the ones who are currently sourcing, the ones who are currently operating, and the ones who failed to acquire. Ask current partners what that partnership is like.
These traditional Searchers often learn on the go, as there is no formal training program for them. They set up their own entity and are off to the races. This is beginning to change such that lead investors are now pushing their Searchers to use certain tools or specific 3rd parties and providing more initial support. While there are some investors who might push in certain directions, for the most part traditional search is a lone-wolf process. If you successfully raise a fund, then you immediately have a support group in at least a couple of your investors and some of their connections. It’s more akin to the self-funded model but with a bigger budget, bigger network, and less control over specific acquisition choices because the investors have to agree. That usually means there are no geographic boundaries, a certain size and growth is needed for a business, and their faith in you needs to continue throughout or they can just pass on deals you bring until your search term ends. But if things go well, you have a very experienced and supportive group backing you, and that can be part of a recipe for huge success!
The Stanford Search Fund Primer is a fantastic resource to learn more about the traditional model. The 2018 release indicates significantly increased life of the sourcing stage of a search, longer time to closing, and lower closing rates than in the past. It digs into average industries, multiples, returns, and salaries as well. While the information isn't 100% accurate and isn't exactly independent research, it is a wonderful starting place to learn about the model and find somewhat current data. They try to be very thorough, and the result is that they produce one of the best reports available.