The goal of any search is finding a business to buy and run. But as anyone who has actually run a search can tell you, the process is much more marathon than sprint. And before taking the first stride, you need to know the route that will—hopefully—lead you to the finish line. Based on conversations with numerous friends in the search world (some of whom have already bought businesses and some of whom are still searching), we’ve assembled a high-level guide to the major steps involved in launching and carrying out your search.
While the process can vary based on considerations such as whether your search is funded or not (link to interview with a searcher) and how you balance proprietary vs. brokered deal flow, what follows should be a good general overview of the day-to-day routine for most searchers, up to the point of finding an acquisition they want to pursue in-depth (which we’ll cover more in later posts).
1. Building the Tech Stack
The first order of business is the tech stack. Most searchers set up a basic website and enough email addresses to manage workflow and avoid bottlenecks if one is blocked or hindered because of the volume of emails being sent. Database subscriptions are another consideration at the outset of the search. There are several major sources of information on private companies, such as Grata (https://grata.com) and Sourcescrub (https://www.sourcescrub.com). Subscriptions typically run $5,000-$10,000 per year.
Searchers who want to explore brokered deals can also set up accounts on websites such as BizBuySell (https://www.bizbuysell.com), which is free. There are also niche brokers that focus on particular industries or geographies, which, according to the searchers we spoke with, is typically where they’ve found better deals. Historically, many searchers have split their time roughly 80%-20% between proprietary and brokered deals, but this is ultimately a matter of individual choice. Today some searchers spend a majority of their time on brokered deals, especially if they are funded and focused on larger targets.
2. Hiring Interns
Once the tech stack is set, it’s time to bring on interns, if a searcher plans to use them. This has become a controversial practice, since most interns have historically been unpaid students who want to build their resume or gain college credits. But today searchers are increasingly paying their interns. Posting an ad on a website such as Searchfunder (https://www.searchfunder.com/) might get you applications from hundreds of eager candidates in just a matter of days. Depending on the searcher’s needs, one to five interns is a reasonable number to shoot for, with anything beyond seven being extremely unusual.
What will the interns do? Typical duties include sorting through databases or web scrapes to flag companies meeting criteria as potential targets, and then helping send initial outreach emails to them. A friend of mine streamlined her search by paying one intern (an MBA student) slightly more to manage the others, which further frees the searcher to prioritize higher-level tasks.
3. Populating a Target List
Any databases subscribed to in step one become platforms for sorting and building a list of potential targets. But if a searcher’s pocketbooks don’t allow for subscriptions, there is always the “old fashioned” approach of combing through LinkedIn, industry association registers, and other free or low-cost sources to assemble a list of potential acquisition targets. The criteria for sorting wheat from chaff often include size, geography, industry, age of the business, and any other characteristics relevant to an investor’s thesis or desired focus area.
“Setting thoughtful parameters upfront is the key,” one searcher told me, “though there is always a balance you have to maintain between focusing in on targets that make the most sense for your search, while still keeping a wide enough net, knowing that you may only get a 2-3% response rate from the companies you reach out to at best.”
4. Reaching Out
As the list of potential targets grows, it’s time to reach out to them. Most searchers do this via email initially, though some begin cold calling early in the campaign as well. By leveraging automation and AI tools, it’s very easy to send, say, 5-10 tailored emails to each target on your list, spaced out over a period of several months. By tweaking the wording, timing, and frequency of your reach outs, you can A-B test what gets the best responses and steadily improve your response rates as time goes by.
Here, as with any sales task, it’s important to remember that you’re going to hear “no” (or in many cases just silence) A LOT. The most successful searchers don’t let this get them down and move on quickly from disgruntled owners and targets that aren’t interested to find others that are more receptive to their outreach.
5. Taking Calls
If you have reached this point in the search (and assuming it is being run remotely well), you are going to start getting replies to your outreach. Now the searcher’s efforts become focused on communicating with responding businesses to further qualify them.
“Perhaps your most important job,” one searcher told me, “is learning to say ‘no’ quickly, and developing not only good scorecards, but also a gut instinct for which deals to pursue and which to pass on.”
The scorecard is a checklist of criteria such as profitability, growth rate, ownership structure, business model, and customer makeup (there might be dozens more) that helps the searcher decide exactly how worthy a business is of further pursuit. A properly constructed scorecard should contain a lot of information, which is not always easy to tease out of a cagey business owner or executive, either because they’re hesitant to share information or, more often than not, they don’t have or understand what is being asked for. One searcher told me that even after three calls with a potential target company and very detailed explanations of requested profit metrics, they continued representing sales figures as profits!
This does highlight one benefit of brokered deals, which is that the broker will typically have collected at least some of this information and can share it right away once non-disclosures are in place. Having at least somewhat reliable information available from Day 1 makes it a lot quicker and easier for searchers to determine whether a business is worth diving into more, without having to have multiple conversations around the difference between sales and profit.
Keep an Eye Out for Diamonds
It’s worth reiterating that searches are marathons rather than sprints. It typically takes at least six months and in many cases 2-3 years before a suitable target is found. It’s a little like dating that way. Over time, a cycle develops of adding to the target list, reaching out to each new potential target, following up on responses, and circling back to check with prior companies that may have responded tepidly or not at all. And while there is no hard and fast rule, a good goal to shoot for is advancing your search to a point where you are submitting 1-3 indications of interest (IOI) per month and 1-2 letters of intent (LOI) per quarter (more on that here: Letter of Intent). And remember that investors—if a searcher has them—will typically want a report on how the search is progressing every quarter or so.
If it sounds overwhelming, remember that your search does not have to look exactly like someone else’s. How you allocate your time across the different activities can vary significantly. One searcher told me the key is to “work smart not hard..If you have the right tools in place you can easily do most of the work of searching in 20 hours a week.” I might add that working smart and hard is not a bad thing, but I definitely agree that there are many opportunities today to use tools such as AI to streamline workflow (LINK). And more of these tools are being released with each passing month.
Hopefully, as your search progresses, magic will eventually happen. From amongst the hundreds or thousands of potential targets your search has parsed, a business will eventually stand out from the rest like a polished diamond. That’s what every searcher is working towards (and likely the point at which 20-hour weeks may turn into 80-hour weeks). Once a high-priority target is found, the day-to-day for a searcher becomes very similar to private equity due diligence—negotiating with management, developing models, arranging financing, and meeting with lawyers and accountants. It can definitely be a bit of a grind, and in the future we will dedicate more posts to this critical and high-stress stage. But without getting the day-to-day rhythm discussed above right, that hectic and wonderful stage will never come…or worse yet, will come with a less than ideal target.
Learn more about private equity transactions with ASM’s Private Equity Training course. The Private Equity Training course at ASimpleModel.com was developed by industry professionals. The content below goes beyond the LBO model to explain how private equity professionals source, structure and close transactions.