Search funds are ‘becoming a thing’ in Australia

If you look forward to the day you can ride off into the sunset and live happily ever after, then you might welcome the news that ‘search funds’ are ‘becoming a thing’ in Australia. Most search funds are happy to write cheques of $10m to $40m for up to 100% ownership of the right business.

Understanding Search Funds
A search fund is an investment vehicle where investors financially back an entrepreneur’s efforts to locate, acquire, manage, and grow a privately held company – a company that already exists and is already doing well. The thesis is that with their extra financial muscle, management expertise and networks, the fund can drive growth.

The process typically involves:
1. Fundraising: The entrepreneur raises initial capital from investors to cover the expenses associated with searching for a suitable company.
2. Search Phase: The entrepreneur dedicates time to identify and evaluate potential acquisition targets that align with predefined investment criteria.
3. Acquisition: Once a suitable company is identified, additional capital may be raised to finance the purchase.
4. Operation: Post-acquisition, the entrepreneur assumes a leadership role, actively managing and growing the business to generate returns for investors and themselves.

What are they searching for?
Each fund is different, of course, however, search funds typically target businesses with specific characteristics to ensure a higher probability of success:

1. Financial Health: Companies demonstrating consistent profitability with annual EBITDA margins above 15%.
2. Recurring Revenue: A stable and predictable income stream, indicating a loyal customer base and reliable cash flow.
3. Customer Diversification: A broad customer base where no single client accounts for more than 15% of total revenue, minimising dependency risks.
4. Established Operations: Businesses with well-documented processes and systems, reducing reliance on current owners and facilitating smoother transitions.
5. Industry Dynamics: Sectors that exhibit low cyclicality, high barriers to entry, and steady growth prospects, ensuring long-term viability.

Australian manufacturers contemplating succession or exit strategies could consider those 5 characteristics as instructive as to (some of) the things any class of investor would find attractive. So, if that’s you, create plans that will take you closer to the description of a search fund target and you’re probably on the right track.

Next Steps
Need help dealing with strategic, succession or exit planning or want to know if you are already attractive to a search fund? Contact Northern Strength. We’re here to connect you with the expertise and support you need to succeed.