3 Reasons to Trust Search Funds More Than You Might Think

In the lower middle market, you’ll hear many bankers and business brokers assert that search funds are low-ball bidders without any form of committed capital. It’s a very black and white point of view, and it’s wrong. The reality is far more nuanced. So before you remove “search funds” when you’re building out your “buyer list”, here are things to consider:

1 – Many search funds are capitalized by dedicated investment pools of capital that aren’t all that different from a PE firm. The same institutional investors that back private equity firms are also investing in search funds. So, if you’re thinking that search funds are fly-by-night operations, think again. They have the same level of backing as some of the most well-respected firms in the industry.

2 – Because a successful search fund acquisition can be highly lucrative, they attract some very talented first-time and veteran business operators. The cream of the crop is going into search fund investing because they see it as an opportunity to strike it big. If you’re working with a talented search fund operator, you can be sure they know what they’re doing.

3 – Search funds have an advantage with certain seller types because of the nature of the buyer. They present the seller with a clear choice of who is going to step in and run their business. That can resonate versus a faceless deal team at a private equity firm. For some sellers, that personal touch makes all the difference.

On the Axial platform, we’ve seen examples play out like this many times, where search funds, (both funded search and self-funded searchers) are able to win transactions by demonstrating high suitability to take on the CEO role and by presenting a credible overall financing package despite not having the turnkey capabilities of a committed capital private equity firm or single family office. Here are a few of those examples:

Teak Partners closed transaction with Triangle Healthcare

• Medical Device Manufacturer based in the Southeast
• Pursuits on Axial: 46
• Revenue: $11.2M / EBITDA: $1.8M
• Multiple: 5x
• Closed: Q1 2022

Cherry Tree Capital closed transaction with ProNova Partners

• Logistics Company based in the Northeast
• Pursuits on Axial: 4
• Revenue: $1.85M / EBITDA: $378K
• Multiple: 2.28x
• Closed: Q2 2022

Camber Peak closed transaction with Transworld Business Advisors 

• Metalworking Company based in the Southeast
• Pursuits on Axial: 25
• Revenue: $7.5M / EBITDA: $2.55M
• Multiple: 4.51x
• Closed: Q2 2022

So, the next time you’re considering working with a search fund, don’t be so quick to write them off. Do your homework; there are plenty of reasons to trust them as credible buyers.