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An alternative to startups
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m 
nables and individual to systematically
search for and acquire a company
Principal raises money in two steps
± Small initial funding to establish the search
firm, cover search expenses and modest salary
± A larger second round to fund the equity
portion of the acquisition
Investor gains
± Right of first refusal on a portion of the
purchased company
± Right to invest in the second round
 
 




A wonderful learning opportunity
± Acquisition experience
± Management of an existing company at
a senior level.
Graduation is a natural break point in
your life.
± Do it now before you are too busy and
too tired
    

e their own boss by running and
building a business, not starting one
Long term financial upside
± High salary and signing bonus
    
 

Mental toughness
Strong will
motional fortitude
The ability to gain investors
confidence
Work alone or get a partner
 
 
Advisors assist by
± Sounding board
± Personal support in bad and good times
± Industry contacts
± Leverage with lawyers, accountants and
bankers
The best advisors have
± Interest, ability and willingness to help the
principal
Don¶t forget friends and your Pepperdine
professors.
 


Individuals with considerable net
worth
Prefer stable cash flow to huge
upside potential
Gets pleasure out of seeing someone
succeed
 

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asier than it seemed
Need 8-
8-12 investors
$150,000 to $300,000 in the initial
round.
References give references
Raise more than you think you will
need.
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1. xecutive summary: an overview of the goals

of the fund and the amount of financing sought.
2. An introduction to the search fund process:
for prospective investors who are not familiar
with this type of acquisition strategy, a brief
explanation is offered, often citing some previous
examples.
3. Search criteria for the industry and company,
or what type of business the entrepreneur is
looking to buy: a list of the criteria that will be
used to qualify and screen businesses seen as
potential acquisition targets.
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V. Timelines for the search process: a list of

activities to be carried out and the expected time
for each,
5. An explanation of the financing sought and
structure of the search fund vehicle: includes a
statement of the size and number of search fund
units sought, an estimate of the follow on
investment, and the structure of the fund
(partnership or corporation).
6. udget breakdown for the search phase:
includes principal's salary, rent, office furniture
and equipment purchases, travel and due
diligence costs, and legal and accounting fees.
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Ö. Future plans for the company/exit

options: a description of potential
improvement plans for the firm, and a
viable exit option for the investors-
investors-e.g.,
buy back of shares, sale, IPO.
8. Personal background of the principals
and allocation of future responsibilities:
details of previous experience, and, if
there is more than one principal, a
description of how responsibilities will be
shared in the search, acquisition, and
operational phase of the process.
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Three steps in identifying target
companies
± Generate deal flow-
flow-create a stream of
candidates
± Screen candidate¶s suitability for
acquisition
± Assess the seller¶s interest and
commitment
 
 


A daunting task without committed funds to buy
a company.
Geographic searches
± Allows network with people you know.
Industry based searches
± One to three industries
± Accommodate limited capital, experience and risk
profile.
± ecome expert in a few industries
Understand drivers
Screen candidates quicker
Gain credibility
Great Majority of searches are industry based.
 



:uick Screen
Venture Opportunity Screening Guide
Like the business you are buying and
be comfortable with the role you will
play
uy the largest business you can get
financed
 :



More important than due diligence
Owners often hesitate to sell their ³baby´
If he is serious there needs to be
systematic reasons for him to want to sell.
± V5yrs old, young kids, loves what he does,
he¶s not serious
± 60yrs old, tired, sloppy operation, nos
successors, he probably is serious
 ï 



Gain access to employees and
management
Have seller inform the employees of
his intention to sell
Get a signed letter of intent.

H NDS TO MAK A COMMITMNT
FOR TOO MUCH TIM AND
NRGY IS WASTD.
¢    

  

  

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Purchase Negotiation
± Principal and Seller
Senior Debt Negotiations
± Principal and the ank
Investment Negotiation
± Principal and Investors
  ¢  

Seller is frequently the founder with
emotional ties.
± Search Funder has advantage over strategic
buyer
Principal is trying to strike a balance
between due diligence and closing the
deal.
± Analysis paralysis trap
± Scaring the seller off
Discover what the needs of the seller are,
and structure the deal to satisfy those
needs.
 
 ¢  

anks don¶t see Search Funds often
± Lack of understanding
Relationship building with banks is
important²
important ²before the deal is found.
anks are looking for the target
company¶s fundamentals.
± Cash flow, profitability, balance sheet
Don¶t neglect the guarantees and the
covenants.
 ë

¢  

If the current investors don¶t want to
invest in the acquisition, forget it.
Principal¶s participation is structured
in the form of carried interest in
common stock.
± Deal specific and subject to negotiation
± Tends to be around 25-
25-30%
± May include performance incentives