One way to think of a search is as a resources optimization effort where the desired outcome is buying a good company at a reasonable price.
A typical search takes 17 a 19 months but a quarter of searchers do not end up acquiring a company.  Of all the resources to be optimized, time is the most precious one.

Successful searches efficiently allocate their time between proprietary searches (80%), brokered searches (15%) and management of operations and the process (5%).

The Strategic, Industry-Focused Proprietary Search


One of the key drivers explaining the success of entrepreneurial acquisitions is that searchers end up buying a company that originally was not for sale, through a smooth and collaborative process. This is why so much time is spent on this form of sourcing.


The first step of the proprietary search is industry-selection. Ideally searchers focus on one or two industries that display the characteristics of value generation, such as: growing, fragmented, low capex and straightforward operations. Next step is to build a list of companies and contact names within these industries. Companies should, to use a Buffettism, have moat, i.e. the ability to maintain their competitive advantage in order to protect long-term profits and market share. Helpful traits are: growing sales and profits, healthy and sustainable EBITDA-margins, and a high percentage of repeat and/or recurring revenue.


Industry experts or ‘river guides’ can be helpful in building industry knowledge and contacts. Having a good understanding of the industry and its major stakeholders is necessary to find a good company and will also be of importance when building a rapport with the potential seller.  River guides and business insiders will assist searchers in building up that knowledge as well as answer questions they might not want to ask potential sellers.


River guides can also introduce searchers to other people in the industry, including potential sellers. The importance and efficiency of these types of introductions cannot be underestimated. Mark Granovetter (Stanford) published wonderful research on the subject in The Strength of Weak Ties (AJS, 1973).


Although river guides are an efficient avenue to reach potential sellers, the searchers should not build their process exclusively on it. It is equally important to build a reach-out process focused on mailing, emailing and cold-calling. While personalized letters report higher success rates, an often-used technique is a personalized email followed up with a phone call a week later. The low probability of success on a single call makes this a numbers game. Stanford’s Center for Entrepreneurial Studies (2016) reported 2 LOIs (Letters of Intent) and 1 due diligence per 500 identified companies for North American searches while IESE’s Search Fund Center (2016) found 2 LOIs and 1 due diligence per 216 identified companies for International searches. It takes about 5 LOIs per successful acquisition.


Within the proprietary search one can make a distinction between the work that is administrative, even mundane, and the work that is personal. To the former belong tasks such as data collection and research, information management, list building and process management. The latter contains efforts like phoning or meeting potential sellers, investor communication and river guides meetings. While it is important for the searchers to be involved in those personal activities, the administrative part can easily be done by interns or, at times, outsourced.


The Tactical, Brokered-Centered Search


It is important to point out that while few brokered-centered searches have been very successful, some have. Business brokers are also a good source to get a better understanding of business and industry dynamics. They can be used when deciding to refocus industries as well. It is, however, important to understand that brokers increase efficiency in the markets and that their incentives will gear the seller to focus almost solely on price, rather than a holistic approach that serves all parties.


Interns can be put efficiently to use managing inbound leads from brokers. They can screen and analyze leads before reporting them to the searchers. This activity is often attractive to interns and gives them a nice break from the more mundane tasks they fulfill.


Operations and Process Management


The searcher also has to spend  time on the management of the operations, such as looking for an office, paying the bills and managing the interns. On a regular basis the searcher should also assess the search process as well as his performance against pre-set goals.


The searchers typically have 2 years to achieve their goal: buying a good company at a reasonable price. Two years is a good timeframe as it allows for enough time to find a company (median 17 months in North America and 19 months Internationally) while putting some pressure on the searcher to stay focused thereby increasing the probability of success.  Two years can nevertheless be long and exhausting. It is therefore crucial that searchers create structure and  short-term performance benchmarks.


A typical structure starts with a daily or weekly routine where the searchers follows a pre-set process of emails, industry/company analysis, calls, reporting, meetings… The process is set up in such a way that it increases the chances of success as it builds on the previously mentioned numbers game. It focuses on increasing the probability of getting a first meeting as well as on eliminating as fast as possible ‘false positives’ like a ‘potential seller’ who is not ready to sell.


Short-term performance benchmarks can help increase the rate of success: number of high-quality first meetings with sellers (five per month) or number of LOIs signed (five or more over the search phase). Another tool is to create social control by sharing your performance measures with other searchers and have regular conference calls with these peers. For solo searchers these peer-mentoring groups can also alleviate the solitary nature of the solo path.



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