A Brief History of Search

27.07.20 01:02 AM Comment(s) By searchfundsearcher

Saying that search funds can be broken down into something as simple as acquiring and running a business that was founded and built by someone else may be an oversimplification, but it is roughly correct. When you think of it this way, it's not crazy to say that the concept has existed for generations—probably millennia. It's not hard to imagine a blacksmith retiring by selling his smithy to an apprentice, or maybe to a traveler who had apprenticed elsewhere but proven himself capable. Benjamin Franklin, who had been an apprentice to his older brother James, found work in Philadelphia at a printing press that published one of only 2 newspapers in Pennsylvania. Benjamin Franklin and a partner (a fellow employee of the printing press) went on to acquire that newspaper from their boss, and after a couple of years Franklin bought out his partner. In the decades that followed, Franklin grew the Pennsylvania Gazette into one of the most successful newspapers in the Colonies and established the base of his fortunes as a printer.


To be clear, Franklin wasn't a Searcher; the point of this story is that the concept of younger, more energetic, and hard-working people acquiring a business and growing it themselves was not new when the first search fund was developed in 1984. It just wasn't very organized. Small businesses were bought by individuals, but usually those individuals had experience in the company (or at least a similar one). If they had investors, they were usually their parents or in-laws. Mentors would have meant less: Yes, Ben Franklin was only 22 when he bought his newspaper, but he had been working in the printing industry since he was 12, and when he was 15, his brother James started his own popular Boston newspaper. At one point, James was imprisoned for refusing to reveal that his brother was the true author of a controversial article printed in his paper, and while James served his sentence, Ben took over the newspaper. Ben was not a Searcher for buying out his boss, but his story does demonstrate the tagline of this website: Entrepreneurship through Acquisition.


EtA, or “self-funded search,” is harder to define than a traditional search fund. It's when someone acquires a business and runs it themselves. Is it “search”? Maybe, if you are organized in your deal-sourcing and lining up your financing. But not everybody who acquires a business is a Searcher.


Whether as an individual or with a partner, someone who dedicates a significant amount of time to source a business and utilizes advisers, investors, lenders, lawyers, etc. to acquire a business outside of their experience and financial capacity is more in-line with search.


Let’s briefly look at the history of search funds. The original traditional search fund was developed in 1984 by then-Harvard Business School Lecturer and Chairman of Continental Cablevision (a multi-billion dollar telecom business that he and his college roommate founded) and current Stanford Business School and Boston Celtics co-owner Professor H. Irving Grousebeck with his former student and then-recent graduate of HBS Jim Southern in Boston. Jim's search fund, Nova Capital, completed the successful acquisition of Uniform Printing, a subsidiary of American Printing, Inc. Jim was introduced to the CEO of American Printing by a different HBS professor of his. Then, 10 years later, his investors received 30 times their acquisition capital. For many years, this held the record as the top-performing traditional search fund. (Although, self-funded Searchers rarely, if ever, report their IRR, and it is sometimes harder to measure if they don’t have outside investors. But some of them have done incredibly well for themselves and their investors.) Today, Jim manages Pacific Lake and has invested in dozens, if not hundreds, of traditional Searchers.


By 2006, approximately 22 years after Jim Southern started the first search, 75 or so traditional Searchers had formed in that time. About a dozen of them were operating companies. An individual was raising from $200k to $300k in funding, and a partnered search was raising between $400k and $600k. Salaries were about $75k, and the rest of the expenses went to search and diligence costs. Fast forward a mere 6 years to 2012, and there had been closer to 150 Searchers in the industry's history, with 26 of them actively sourcing. Statistics of the time indicate that there was around a 20% fail to acquire rate. At that time, the vast majority of traditional Searchers were still coming from either Stanford's Graduate School of Business or Harvard Business School. Schools such as Tepper, Darden, and Marshall were just beginning to develop programs that broached the industry.


Over the years, the concept of having individuals acquire a company to operate themselves became more widespread. This is due in part to the practice building upon itself and also in part to the books, blogs, and websites (such as Searchfunder) that have helped to spread the word. It may well be that there aren’t really that many more self-funded Searchers but that there are simply more who have joined the community and escaped the anonymity of being unknown individuals buying a business. However, there are definitely more traditional- and accelerator-backed Searchers now. In 2019, more Searchers joined the top 2 accelerators than there were actively sourcing Searchers in 2006.


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