Your Time Horizon

Your Time Horizon

When starting out in the search fund space, it is only natural for searchers to be grateful for every funding commitment you receive. However, it’s important to remember that early discussions with investors are not just for their vetting of you, but also for you to evaluate their suitability for your needs and vision. You should consider factors such as their track record as mentors, the skill sets they bring to the table, and more.

In his book, “Search Funds & Entrepreneurial Acquisitions,” Jan Simon outlined several factors worth considering. Based on these factors, I created an Investor & Advisor Pie chart which you can easily access on my Resources page and use by clicking “Copy base” in the upper left-hand corner of the AirTable.

One particularly intriguing concept gaining attention is the time horizon for investment. This topic was discussed at a Stanford Search CEO conference, where the data presented suggested that some searchers and their investors may be undervaluing their businesses during exit, potentially leaving significant sums on the table. The impression was that our value-focused searchers might benefit from developing a more strategic mindset at the time of exit. Understandably, they may be overstating the warts in their business while underappreciating the growth that a new owner might bring to the organization.

During the Chicago Booth conference this week, the topic of Search CEOs potentially selling their companies too early and leaving money on the table was mentioned multiple times. It’s worth considering why one would be inclined to sell a business that has experienced substantial growth and consistent revenue generation. Here are a couple of potential explanations:

  • CEO burnout or life changes: Being an entrepreneur is extremely hard, and some CEOs struggle with mental health and exhaustion due to the strains. However, the solution to CEO burnout might not be to sell, but to hire more support or bring in another capable CEO while the searcher CEO takes on a chairman position.
  • CEO diversification: After spending 7 to 10 years learning how to search, then searching and then operating their business, a Searcher CEO may not want to have the bulk of their assets tied to one company, even if it’s their own, from a financial planning and diversification standpoint.
  •  Investor need for liquidity: Over the course of 5 to 7 years of business ownership, circumstances can change wildly in our economic environment. Cash that an individual investor did not  needed in the early stages of the cycle may be needed now for other priorities, such as a child’s medical care, hobbies, or college expenses. Being tied up in an illiquid investment for 5 to 7 years would strain most people. Fund managers may be keen to deliver solid returns to their investors to help their track record so that they can raise more money for their next fund.

One option that may be on your mind is: what about selling through a secondary market as seen in other investment spaces?  While there have been some harbingers of a secondary market for search funds, it has not yet fully developed. But who knows, maybe by the time you get to exiting, there will be one. 

Until then, what should you, as an aspiring searcher, do?

  • Reflect honestly on your vision for yourself in 5 to 7 years. Will you run this business for the rest of your life, build your own private equity firm, or pursue a different path altogether?
  • Have open conversations with your investors about their time horizon. If you’ve raised funds from friends and family, ensure they understand your plans and when they will likely see a return, if at all.  Similarly, make sure you have clarity on the expectations of the experienced search fund investors on you cap table. Keeping everyone aligned is crucial.

By considering these aspects, you can navigate your time horizon effectively and make informed decisions that align with your investors’ needs.

To learn more about what was discussed at Chicago Booth and other conferences, please join us for our Fall Conference Review.