Arrive - March/April 2015

46 ;rrıve • March/April 2015 • ;;;;;;;;;;;;;;.;;; bringing in successful searchers as guest speakers. Harvard last year held its first-ever search fund summit.

UNDERSTANDING THE
COMPETITION

But business school graduates should think carefully before taking the plunge into search funds, says Dave Mawhinney, co-director of the Center for Innovation and Entrepreneurship at Carnegie Mellon’s Tepper School of Business.

“What most people fail to understand
is that it is a hugely competitive field,”
Mawhinney says. “In a given market, hun-
dreds of other people are looking for the
same deal.”
Large private equity firms are sni;ng
around for the next Instagram or Airbnb,
which leaves smaller equity firms crowded
out of the mega deals. Now, those smaller
firms have started looking for the same
companies that used to be the province
of search funds.

That’s why successful search funds typically turn their investors’ dollars to small family-owned companies that you’ve never heard of, not booming tech startups.

owners are often looking to streamline operations, which can mean cutting longtime sta; members who had relationships with the company’s founder—but not with the new business-school bosses.

FINDING A DIAMOND

After graduating from Harvard, Healy had planned to go back to the corporate job where he had interned to support his wife and three young sons. But then two of his professors approached him about starting a search fund.

As a West Point graduate and former Army captain, Healy had the self-motivation and take-charge mentality necessary to be an entrepreneur, the professors said.

And they were willing to bankroll his search.

“My wife said, ‘I can see a light in your
eyes when you talk about a search fund,’ ”
Healy says. Running Currahee Capital has
since been great for both his family life
and career, he says. He still works ;;- to
on the act of running a business, not on
the process. He wants them to be sure that
owning a company is what motivates them.
“If their heart thumps a little at the
idea,” Dodson says, “it’s a career, not an
investment.”
Even as more private equity compa-
nies move into the market, Dodson thinks
searchers have an advantage with the
businesses they are looking to buy.

A search fund comes with a built-in manager or management team, something that can be attractive to a business owner looking to retire.

“The dominant reason a ;;-year-old
wants to sell their business is not so they
can become a minority shareholder,”
Dodson says. “The primary reason some-
one is leaving a $; million to $; million
business is because they want out.”
“Do you have a set of relationships
that will get you in the door?” Mawhinney
says. “Do you have investors with more
resources, which will allow you to close a
deal more quickly?”
Peter Fillman, another ;;;; Harvard
grad, says his unfair advantage is not
inherited wealth or family connections.
Rather, it’s his rural upbringing.

“At my core, I’m a farmer from Illinois,” he says.

Fillman, ;;, says his Oak Grove Leader-
ship is looking for a company to buy in either
Like many of his colleagues, Fillman
isn’t looking for a particular type of com-
pany, so much as one that meets his crite-
ria, including $; million or more in annual
profits and a large and diverse customer
base and a reasonable selling price.

He says finding the company is the hard part. Given strong investor interest, raising money is easier than most would expect. That’s why he thinks a lot of the perceived risk of starting a search fund can be overcome by believing in yourself.

“People who do this are interested in having a certain amount of control over their own destiny,” Fillman says. “You get to pick the business, run it that way you want to run it, and reap the rewards of your own e;ort.”

“I’M LOOKING FOR THAT ONE DIAMOND.

I CAN’T JUST BUY ANYTHING.” ;SEAN HEALY

;;-hour days, but from his home o;ce.
Much of that time is spent talking with
business brokers trying to unload a com-
pany. Healy says that less than ; percent
of the deals he sees are worth pursuing.
“I’m looking for that one diamond,”
Healy says. “I can’t just buy anything.”
When not talking with brokers and vet-
ting deals, Healy researches companies
that are not on the market, asking owners
whether they’re interested in selling.
Some business owners won’t trust
brokers or private equity companies with
the business they’ve built over a lifetime,
Healy says, but he believes they can
trust him with their legacy.

LANDING THE DEAL

David Dodson knows how to successfully complete a search fund.

Dodson bought his first company two years after earning an MBA from Stanford in ;;;; and subsequently completed two more search funds.

Now a lecturer in management at the
Stanford Graduate School of Business,
Dodson’s first advice to students is to focus
Once that dry-cleaner or trucking com-
pany is purchased, they use their business
school acumen to make the company
more e;cient.

Despite the competition, Mawhinney says a search fund can be the right fit for some business school graduates because it avoids the risk of building a new company from scratch.

It’s an oft-quoted statistic that half of all new businesses fail within five years. Meanwhile, an existing company has a track record of profitability and an established customer base.

Not all search funds have success stories, though. Stanford research shows that just over a quarter of search funds close without making an acquisition, which means investors have nothing to show for their money. And of search funds that acquire a company, ;; percent of those businesses fail or are sold for less than the purchase price.