Frequently Asked Questions

No! I invest in a wide array of opportunities across a wide range of business models and industries

Though some industries are naturally more attractive than others, I am relatively agnostic as it relates to industry, and can’t say that I have a strong preference for a small handful of verticals over others. Within my portfolio, you’ll notice a wide array of companies operating across a wide range of business models and industries. One of the primary reasons underlying this flexibility is the fact that there are an overwhelming number of companies operating within an overwhelming number of industries that you & I still don’t know exist. One of the joys of investing in search funds is learning about these highly niche-oriented industries on a near-daily basis. This is one of the primary reasons why, across most search fund investors, you’ll notice a focus on certain industry and business model characteristics, as opposed to a focus on a specific industry itself.

At present, my search fund and operating company investments are exclusively within Canada and the United States.

From first-hand experience as a searcher myself, I understand how difficult it can be to construct a cap table while simultaneously providing each investor with their desired allocation. As a result, I tend to defer to the searcher, working with them to find an allocation percentage that is suitable for them. On average, I tend to represent anywhere between 5 – 10% of a given cap table, which often equates to a full unit investment ($30 – $50K on average)

As you might expect, the size of our equity check can and does vary. On average, however, my follow-on investments are typically in the $500 – $650K range, however that is mostly a function of the average equity raised per transaction divided by the average number of investors in question. This follow-on investment amount can flex upwards or downwards depending on the preferences of the searcher in question

I invest in both the traditional/funded search model, as well as self-funded search. At present, I do not invest in search funds or transactions sourced through incubator or accelerator programs

The number varies from year-to-year, but the guiding principle is that I prefer to invest in a smaller number of search funds, and thus a smaller number of operating companies. This is the only strategy that will allow me to be the type of investor that I wish to be: That is, somebody who is available, who has a close personal relationship with entrepreneurs, and somebody who can get into the details when required. This usually means investing in ~10 search funds in any given year.

Though different investors are likely to have different opinions on this question, I strongly prefer targeting the highest quality business possible, and, if necessary, paying a price that reflects the underlying quality of that business, even if the price is higher than the 3-5x goal that most search funds start out with. I say this for a number of different reasons, including:

• Though price is undoubtedly important, it is not the only consideration when making any given purchase decision. For example: How that purchase price is structured can often be just as important. Two enterprise values under two completely different offer structures may still yield very different outcomes for the buyer
  
  
• It will surprise nobody to hear that no two businesses are created equally. I really enjoyed this brief slide deck from Robert Vinall of RV Capital, where he used data to illustrate that buying a business with high operating leverage and high pricing power at a high multiple beats buying a business with no operating leverage and no pricing power at a low multiple virtually every time: RV Capital: Mistakes of Omission
  
  
• In my experience, a very low purchase price can sometimes “blind” searchers, and create a situation in which they are willing to accept business and industry problems that they otherwise wouldn’t or shouldn’t be comfortable accepting. Low quality businesses – even if they’re acquired at low multiples – often require a lot time, energy and resources, across financial, operational, and human capital grounds. This type of work is often very difficult to successfully execute on, especially for a first-time CEO who likely has no experience working in similar contexts
  
  
• If we reasonably agree that lower quality businesses ought to trade at lower multiples, then it must also be true that higher quality businesses ought to trade at higher multiples. Paying this higher price can be thought of as a necessary “tax” or “cost of admission” specific to acquiring a high quality business operating within a high quality industry. A.J. Wassestein wrote a wonderfully informative case note exploring entry multiples, and the difference between being thoughtfully disciplined vs. being unnecessarily frugal on price: On the Nature of Entry Multiples
  
  
• In my experience, sellers operating high quality businesses in high quality industries don’t tend to drastically under-value their companies as much as some buyers might hope: First, it is not particularly difficult for a seller to do the math required to understand that a 4x multiple means that they’d be equally well off if they simply chose to operate the business for another 4 years. If these sellers are intelligent enough to have built a business that you’re willing to bet the next 10 years of your career on, chances are they’re also intelligent enough to situate a 4x valuation into a useful context, despite their lack of experience in investment banking or private equity. Second, most sellers have already been approached by countless potential acquirors over the years, many of whom have already provided them with a range of possible valuations for their companies, and these valuation ranges play a large role in informing the price at which the owner is now willing to sell.
  
  

All else being equal, it should surprise nobody to hear that a low purchase price can serve as a foundational component to any investment thesis. However, in my opinion, it would be a mistake to blindly decline the opportunity to acquire a fantastic business operating within a fantastic industry simply because the headline price exceeds a targeted range. At the risk of invoking a bit of a cliche, Charlie Munger summed it up best when when he said: “A great business at a fair price is superior to a fair business at a great price”.

Though there is no single recipe for how to successfully conduct an exercise as long, complex, and multi-variable as searching for a company to acquire, below are a few things that I’ve observed over the years that tend to be predictive of success more often than not:

(1) Offer Frequency: Great searchers issue offers (IOIs and LOIs) very frequently, and often within the first 6 months of their search process. As I articulate in much greater detail in this blog post, savvy acquirors utilize LOIs strategically, for purposes well beyond the simple act of papering their desire to purchase a company exactly as outlined in the document. The vast majority of terms contained within an LOI are not legally binding, and as a result buyers often issue them to get exclusivity, to quickly and efficiently surface the seller’s valuation expectations (in addition to “anchoring” those valuation expectations), and to slowly build switching costs with them over time. Finally, issuing offers frequently provides first-time buyers with much-needed “practice”: After issuing a given offer, you’re likely to be asked several questions for which you won’t have readily available answers, and as a result, it’s best to leverage these as opportunities to refine your “pitch” and positioning over time.

(2) A/B Test: Good searchers make educated guesses about what is working and not working, whereas great searchers use data to make those decisions for them. For example, when trying to optimize for email open rates, great searchers A/B test two different subject lines over a two week period, and bring forward the option with the higher open rate (for example, 100 emails use subject line A, and 100 emails use subject line B). Thereafter, they take that “winning” subject line and test it against another option during the next two-week period. Iterating through this process over several months in two week increments is likely to produce sustainably high open rates over time. They will similarly A/B test response rates with different types of content in the body of their emails: They will use response rates to test the effectiveness of things like in-email videos, buttons to online calendars, or highly tailored content to see which options work and which ones do not.

(3) Leverage Your Investors: Even for those with transaction experience, making the decision of whether or not to spend more time on any given deal is often a very difficult decision to make, especially if you’re making it in your sole capacity. Instead of bearing all of this weight yourself, find a small handful of trusted and engaged investors in your cap table and utilize them to help you make the decision. Instead of spending 3 weeks with a seller and sending your investors a 20-page introductory memo, spend 2 days with the seller and send your investors a 2-page memo. By doing this, we can help you think through the merits & risks of the opportunity, present you with questions that might not have occurred to you, help you focus on what’s important vs. what can wait until later, and share perspectives from similar companies/transactions that we may have worked on in the past. From the searcher’s perspective, this process can help save you valuable time that might otherwise have been spent on a deal that was unlikely to close in the first place. Too many searchers think that their view on any given opportunity needs to be “fully baked” before presenting it to investors: As long as you’re clear that the spirit of the memo is to collect early questions, look for red flags, and to solicit quick go/no-go opinions, then your opinions on the deal need not be fully formed yet.

(4) Surface Valuation Expectations Early: In my experience, the number one source of wasted time for searchers is spending too much time with sellers whose valuation expectations are well beyond what they are willing to pay. For this reason, the best searchers surface valuation expectations very early, as soon as the first call. These conversations (though uncomfortable at first) can serve as a very early checkpoint regarding whether the opportunity in question is worth an incremental investment of their time. One way to surface valuation expectations early could sound something like the following: “As I’ve immersed myself in [Industry XYZ], I’ve come to appreciate that businesses like yours are trading at 4-6x EBITDA. Is that generally consistent with your understanding?“

Each of these options has its respective pros and cons. As a result, I think there is room in a search process for both strategies, though some investors may disagree with me. A brief summary of my thoughts is presented below:

Proprietary: One BIG Pro, But a Long List of Cons

I suspect most buyers are hoping to close a deal sourced through proprietary means, and for good reason: Ideally, we reach out to a seller directly, form a close personal relationship with them, and begin the process of acquiring their company in the absence of competitive bidders. Naturally, as buyers, we hope that the price we pay is ultimately reflective of that lack of competition. While this scenario does indeed happen (it describes how I was able to source & acquire my own company in 2014), it’s important to at least acknowledge that this potential benefit comes with some very real costs. In many instances these costs are very much worth paying, however you should at least be aware of what they are. More specifically:

• Proprietary deal-flow generation is enormously time-consuming, manual, and repetitive: I reached out to my seller every month for 8 months until he finally responded to me 9 months after I first made contact with him. This is not atypical. Though better technology stacks and strong intern programs can certainly help ease this burden, it is difficult to escape these realities entirely
• It often takes months for direct outreach to begin producing a steady stream of opportunities for buyers to evaluate. This is particularly important to remember during the early days of a search process
• It is often difficult to know whether you have a real seller on your hands, and this is one of the most frequent sources of wasted time for searchers: Some sellers were never anything more than “tire kickers”, some are looking for a free valuation of their companies, some are looking for a competitive stalking horse, and others may simply appreciate the ego boost
• Given that, in most instances, sellers weren’t proactively preparing for a sale in advance of your outreach to them, the state of the information required by any buyer often leaves much to be desired: If it exists at all, the information is often messy, in unusable formats, spread out across countless internal systems, or difficult for the seller to quickly produce
• Without the guidance of knowledgeable and experienced advisors, sometimes sellers have valuation or structural expectations that are far outside of market, significantly decreasing the likelihood of a transaction occurring (though it’s worth mentioning that unsophisticated or inexperienced advisors can sometimes produce this same outcome)
  
  

Brokered: One BIG con, but a Long List of Pros

It should surprise nobody to hear that the job of an intermediary is to get the highest possible price for their clients (most brokers are compensated as a percentage of enterprise value), and they often do so by making the process as competitive as it can possibly be. These highly competitive processes often fail to produce entry multiples that are palatable for search funds, especially if the bidding process includes strategic acquirors who have baked potential cost and revenue synergies into their valuations. Among other concerns, these high entry multiples don’t adequately account for the “first time CEO mistakes” that we should reasonably expect a searcher to make in her first 1-2 years on the job. With that said, however, brokered deal flow does have some redeeming qualities, including:

• It’s fast: You can email a broker today, and get involved in a deal process tomorrow. This is particularly valuable to remember during the first few months of a search process, where the proprietary deal-flow engine likely hasn’t yet produced a regular stream of opportunities for you to evaluate.
• Brokered transactions often provide searchers with a useful source of “practice”, to help them refine their pitch and positioning with sellers during subsequent opportunities
• Given the fact that the owner has taken the step of hiring a broker, you can be reasonably sure that you do indeed have a “real” seller on your hands
• Good brokers usually spend months working with their clients before formally going to market, and as a result, the state of the information required by any buyer is often in considerably better shape (though this is less true for brokers who are inexperienced and/or less sophisticated)
• Good brokers usually work with their sellers to properly calibrate their expectations on valuation and structure. Given the large amount of time and money that a good broker will spend on any given transaction, they’re unlikely to accept an engagement that they view as being unlikely to close due to an unreasonably high valuation expectation (again, however, this is less true for brokers who are inexperienced and/or less sophisticated)
• Brokered deal-flow acted as my best source of new industry ideation, which I then pursued within my proprietary outreach efforts: When evaluating any given brokered transaction, even if the company in question isn’t of interest to you, the broader industry may be. I would often use the information contained within a CIM to directly inform my outreach efforts to other companies operating within that same industry

It can often be difficult to balance the importance of in-person interaction on one hand, with the necessity of managing costs on the other. For this reason, I would suggest that searchers acquire the following information before spending meaningful amounts of time and money visiting a seller:

• Financials: ~3 years of historical financial statements is ideal, but absent that, searchers must at least confirm that the company in question is within the range of their desired revenue and EBITDA targets
• Valuation Expectations: Though there doesn’t need to be perfect alignment on valuation expectations between buyer and seller, they at least need to be “close enough” to justify a visit. For example: If you want to pay 5x EBITDA but your seller wants 5x revenue, then you can comfortably pass on the opportunity to meet them in person. However, if that seller wants, say, 6x EBITDA, then I would venture to say that you’re “close enough” to justify a plane ticket

The data is reasonably clear: Industry-specific searches tend to result in acquisitions more frequently than industry-agnostic searches. The reasons why this is so should be relatively intuitive: As one learns more about any given industry, the quality of conversations with business owners increases, diligence questions are more specific and informed, industry relationships compound, credibility increases, and sellers get more confidence in the ability of the searcher to run the business post-close, to name just a few.

With that said, many searchers don’t have the luxury of 5+ years of work experience in [Industry XYZ] that serves as a basis for an investment thesis within [Industry XYZ]. This may be due to the fact that most searchers tend to come from “generalist” backgrounds in consulting, private equity, or investment banking, where they likely worked across a wide range of different industries. As a result, at least in my experience, the majority of search funds still tend to be reasonably agnostic as it relates to industry, preferring to focus on industry and business model characteristics more than a specific industry itself. This more agnostic model can and does work, though searchers naturally miss out on some of the very real benefits of focus mentioned above.

It’s worth noting that within almost every PPM that I’ve ever read, searchers name and describe 2-3 “industries of focus”, which represent the industries in which a specific investment thesis has emerged. While this is normal and representative of good practice (after all, one does indeed need to start somewhere), it is also worth noting that in 90%+ of cases, searchers acquire outside of these initial 2-3 industries. This dynamic can be explained by a wide variety of reasons, some of which include:

• The initial investment thesis wasn’t particularly strong to begin with
• The searcher learned about a new industry (or, more likely, they learned about countless new industries) throughout the course of their 2-year search process, and these new industries proved to be more attractive than the ones that they initially profiled
• Something within their initial target industries changed and made them less attractive as a result (regulatory change, competitive change, fewer businesses for sale than expected, valuation expectations higher than expected, etc.)

Though there may be exceptions to this, in my experience, it is far too prohibitive to have both an industry preference and a geographic preference. The number of targets operating within [Industry XYZ] in [Geography ABC] is likely far too small to provide a searcher with a realistic chance of sourcing and acquiring a great company. If a searcher has to have a focus, I’d strongly advise them to choose only one of these possibilities.

Because I have received this question with such a high degree of frequency over the years, I went directly to the person who (literally) wrote the book on partnerships: Noam Wasserman, author of The Founder’s Dilemmas, is recognized as the world’s foremost expert on how to form and maintain high performing partnerships in entrepreneurial contexts. You can check out our podcast episode here (Everything You’ve Ever Wanted to Know About Working with a Partner, with Dr. Noam Wasserman, Author of The Founder’s Dilemmas), and/or a written transcript of our discussion here.

For me, the most difficult part of being a searcher had nothing to do with industry analysis, modelling, deal structuring, or anything else that one is likely to learn about in business school. Instead, I found that the most challenging aspect of the search journey was the feeling that I was never really making any notable progress. For lack of a better way to put it, I often felt as if I was “floating”… Neither progressing nor regressing in any meaningful way.

Though this may not sound like a particularly large challenge on the surface, it’s more difficult than you might think, especially for those of us who (for better or for worse) derive a lot of our satisfaction from the concept of regular achievement. More challenging still was having to sit with this feeling for upwards of 2 years.

In academics, we get grades and eventually progress to more advanced classes. In our professional lives, we get performance reviews, raises, and promotions, all of which serve as tangible examples of progress, momentum and achievement. I found the search process to be totally bereft of these types of feedback mechanisms, and as a result, it always felt very difficult to know whether all of my efforts were leading to anything.

To me, the search process felt incredibly binary: Either I would buy a company, or I wouldn’t. If I was lucky enough to buy one, either I would make money for my investors or I wouldn’t. The seemingly binary nature of the path that I had chosen created a very strong fear of failure for me, and what I’ve come to learn is that fear of failure tends to be most acute for those who have never really failed at anything of consequence in their professional lives.

Unfortunately, I can’t say that I have any tools or strategies that are likely to combat these feelings. Instead, I hope that readers who are currently feeling something similar feel slightly less alone, and can appreciate that substantially all of their peers are likely feeling something similar.

These types of situations are actually reasonably common, and happen more frequently than most might suspect. When a given search fund has two or more companies under LOI at any given time, eventually they’re forced to choose only one of them, as the later stages of a transaction tend to be particular time- and resource-intensive. As a result, any deals that they choose not to pursue can be handed off to other searchers, so long as the seller is amenable to such an arrangement.

In return for handing off the opportunity, the referring searcher is usually entitled to some form of compensation from the recipient searcher. Ultimately, these are negotiated agreements and can take a wide variety of forms, but most frequently I tend to see at least two of the following three terms included as part of that compensation package (sometimes all three are included):

(1) A flat $$ “finders fee” (usually ~$100-$200K)
(2) A right of fist refusal for the investors of the referring search fund to participate in X% of the equity in the acquired company (usually ~20% or so)
(3) 100-300 bps of carry: Importantly, this typically comes out of the searcher’s personal allocation of carry, which in my opinion is a very meaningful concession

First off, and mostly importantly, I will never impose my will upon a searcher or CEO: If they want to engage on a frequent and tactical level, that’s great. If they prefer to engage less frequently and work more autonomously, that’s great too. As a former Searcher and CEO myself, I recognize that we each have our own unique working styles, and as a result I try to tailor my approach to each individual’s personal preferences. With that said, all else being equal, I tend to prefer the following:

(1) Getting involved in deals early: I like to work with searchers to help them think through problems and opportunities well before an LOI is ever issued. The earlier I can engage, the more I can help you think through the merits and risks of any given opportunity.

(2) Personal Considerations: Though searchers and CEOs will encounter countless commercial problems and opportunities throughout their respective journeys, I know from first-hand experience what a deeply personal experience it is to be both a leader and an entrepreneur. As a result, I do my best to replicate what one of my mentors did for me, when he told me “I want to be the investor that you come to with the questions that you’re too scared to ask your other investors“

(3) Detailed Q+A: Once a deal is under LOI, I tend to dig into the details quite thoroughly, which often manifests in several Q+A sessions with the searcher in question. I’m hopeful that these sessions are viewed by searchers as being helpful and additive, not burdensome and repetitive

Beyond these, I have no strong preferences specific to which stage of the journey you currently find yourself in (launch, searching, diligence, acquisition, operating, preparing for exit, etc.), nor do I think I’m much stronger in one area than the others: Given that I have navigated each of these stages personally, I feel as if I can be helpful across any one of them.

Yes! Sitting on Boards is one of the most enjoyable and energizing parts of what I do. However, I’ll only join a Board if there is mutual interest between myself and the searcher. I have never demanded a Board seat as part of making an investment

Taking over a business can be very overwhelming, and as a result, it’s often difficult to know where to start. To inform how and where you start, I think it’s best to start with recognizing a very practical reality: Even if you run the world’s greatest due diligence process, chances are high that there is still an overwhelming amount of information that you don’t yet know about your company. Most new CEOs, including and especially myself, agree that they often learn more about their companies in the first month of operating it than they did in the six months of due diligence that preceded their purchase. For this reason, I would suggest that you diagnose before you prescribe: That is, take the time to truly understand what the problems and opportunities are in your business before you start making definitive decisions around them.

One way to do this is to have one-on-one meetings with every employee during your first week or two on the job. Indeed, this is how I spent my first two weeks as a new CEO, and doing so provided me with the following benefits:

1. It provided me with an opportunity to introduce myself on a much more personal level to each employee
2. It gave individual employees an opportunity to ask me questions after the initial shock of the company’s sale had subsided (Believe me: Even if nobody asks any questions at the “town hall” meeting announcing the ownership change, everybody has questions, and most likely some set of fears that you may be able to quickly allay)
3. It provided me with a much more nuanced understanding of the company problems and opportunities to be acted upon. Interestingly, I came to appreciate that the types of problems & opportunities that you learn once you’re within the company are often quite different from those that you learned when you were still external to the company
4. Somewhere within the notes and observations that I collected over these first two weeks on the job was a “To Do” list that informed my own priority list for my first 1-6 months on the job

Those with transaction experience are likely familiar with the concept of a “100-Day Plan”, a document that governs how the newly installed management team will be spending their time (including which problems and opportunities ought to be prioritized) within the first 100 days of operations.

Though I think 100-day plans can indeed be useful, I say this with several caveats:

On one hand, being thoughtful and deliberate and how and where to spend your time is rarely going to be a bad idea. Even if you don’t execute on the 100-day plan, simply going through the process of crafting it is likely to yield several useful insights.

On the other hand, however: As Mike Tyson famously said: “Every boxer has a plan until he gets punched in the face”: The reality is that most 100-day plans crafted prior to an acquisition are based on an incomplete understanding of the business, and as a result, blindly executing on such a plan could actually be counterproductive in some instances.

For this reason, my opinion is that most 100-day plans are best left at a reasonably general level for first-time CEOs. For example: If your thesis revolves around building out an internal sales & marketing function (where no similar functions existed under prior ownership) instead of saying that you’ll “Hire X new Account Executives within Y months”, I would instead suggest something like: “Within the first 90 days, complete a full diagnosis of the sales and marketing operations, and craft a plan of action to be reported to the Board by our first Board Meeting”.

Though there is no universally applicable answer to this question, a general rule I believe that the extent of your communication to external stakeholders should be roughly commensurate with the “importance” of the stakeholder in question: For example, if you have a single customer that represents, say, 30% of your revenue, then it’s likely in your best interest to get in touch with this customer early and intimately (ideally before the transaction even closes). If, however, you have hundreds of customers and none of them represent more than, say, 5% of sales, then you can likely get away with very light-touch communication, or perhaps even no communication at all in some circumstances.

In my own case, I chose to reach out to all of my customers with a stock email ~3 months after I had already assumed the CEO role. My logic here was that customers would already be in possession of 3 months’ worth of tangible proof that their lives wouldn’t be adversely impacted under the new ownership group. Though I agonized over the specific details of the email prior to sending it (when to send it, how much to say, whether to include personal contact information, and so on), to my surprise at the time, I didn’t get a single response or instance of push-back from any customer. What I came to appreciate is that each of my customers were understandably worried about themselves and their own companies, and as long as our ownership group could maintain or improve the service that they were receiving, they didn’t particularly care who was writing the checks.


In subsequent meetings with customers throughout my first year, I came to appreciate that customers want to know how the change is likely to impact them (they don’t care that your parents were entrepreneurs, and that you left your job at Goldman because it didn’t provide you with the sense of ownership that you were ultimately seeking). If you’re increasing the size of your support team to better serve existing customers, tell them. If you’re changing the sales function to ensure more frequent touch-points with existing customers, tell them. If you’ve investing heavily in product to accelerate your roadmap, tell them. But you may want to keep your grandiose company growth plans to yourself, as its often not clear how those plans will positively impact their experience as an existing customer.

Before you take a page from my playbook and ignore your own newly acquired customers for your first three months on the job, I would highly suggest that you consult with your Board of Directors to seek their guidance, as each business and situation is unique, and may necessitate a very different approach.

Cap table construction is one of the most important decisions that any prospective searcher will make, and as a result, I suggest that you act with the thoughtfulness, patience, and diligence required of such a decision. Below are a few of the variables that you may wish to consider in selecting members of your own cap table:

• Diversity: At the risk of stating the obvious, one cannot overstate the importance of diversity among investors. This includes not just visible considerations (things like race, gender, and age, all of which are incredibly important), but also diversity of experience and expertise. This is important not only because of the well-established fact that diverse teams tend to make better decisions than more homogenous teams, but also because as a Searcher & CEO, it is a virtual certainty that you will encounter both problems and opportunities spanning all of the functional disciplines within your company (sales, marketing, finance, operations, HR, and so on), and as a result, there is considerable value in being supported by investors who can each bring specific expertise to bear in one or more of these disciplines. Be sure not to limit your pursuit of diversity to just demographics and functional areas of expertise, however. Instead, attempt to include diversity in substantially all of its forms (experienced investors v. experienced operators, those from Country A v. Country B, growth-oriented investors v. value-oriented investors, etc.) to extract the maximum possible benefits.
  
  
• Don’t Over-Index on a Single Profile: Closely related to the concept of diversity, I have found that there are diminishing marginal returns to adding a greater number of investors with very similar profiles: Your first sales expert (or M&A expert, or operations expert, or Private Equity investor) is incredibly helpful. Your second expert of the same variety is somewhat helpful, and your third expert of the same variety is unlikely to provide much incremental value at all. Remember that different “archetypes” of investors are likely to provide you with different types of value, and ideally you will build your cap table in such a way that you’re able to leverage all such sources of value: For example, large institutional investors can help you with things like training bootcamps, in-house fractional recruiters, legal and financial resources to help with the due diligence process, and so on. Smaller individual investors on the other hand are likely to offer you a very different type of help, though this particular flavor of it is no less valuable. Most of the time, this type of relationship will be defined by intimacy, availability, capacity, and personalized attention. As best as you can, try to extract all of the different types of value that different “archetypes” of investors are able to offer you.
  
  
• Availability and Bandwidth: Ensure that your investors possess both the willingness and ability to actually help you when you need it most. When your CFO unexpectedly tenders her resignation on a Friday evening and tells you that she doesn’t plan to report into work on Monday morning, you want an investor who is willing to spend their Saturday helping you think through the situation, not somebody who you’ll have to wait a week to speak to.
  
  
• The Person is More Important than the Entity: Naturally, larger investors often choose one of their team members to represent them within the cap tables of their various searchers and portfolio companies. While the reputation of the overall firm is naturally important, it was my experience that the individual representative from that institution was a more important consideration than the institution itself. For example: While you may be very excited at the prospect of having Institution XYZ on your cap table, learning from and working with the Founder of that firm is likely a very different proposition than learning from and working with its newly hired Senior Associate. Beyond considerations related to experience and expertise, it will surprise nobody to hear that a Searcher may simply have better personal chemistry with Partner A than Partner B. For these reasons and more, when adding an institutional investor to your cap table, I would weigh the individual more highly than I would the institution.
  
  
• Reputation Among Your Fellow Searchers & CEOs: Perhaps the most important consideration of all is the investor’s reputation among fellow searchers and CEOs: Based on their first-hand experience, do we do what we say we’re going to do? Are we genuinely helpful, engaged, and available? Do our stated value propositions ring true, or are they mostly hollow? Remember, what we say during the fundraising process is one thing, but what we do once we’re actually working alongside you is what really matters.

The decision of whether to raise a search fund versus attempting to a self-fund a search is a deeply personal one, and I can’t say that either option is unambiguously superior to the other. This is one of the reasons why I happily invest in both structures. That said, when I first decided to become an entrepreneur myself in 2012, I chose to do so via the traditional search fund model. At the time, this was the right decision for me for the following reasons (of course, all, some, of none of these may be applicable to you):

• Deal Size: I wanted the ability to purchase a larger company on the SMB spectrum, and I viewed the traditional search model as the one that was best suited to that preference. As I articulate in much more detail here (Busting the Biggest Myth About Purchasing and Operating Small Companies), it is a myth that it is easier to purchase and operate a smaller company than it is to purchase and operate a larger one
  
  
• Risk Tolerance: I viewed the self-funded search model as unambiguously riskier than that of the traditional model (though, naturally, these incremental risks often give rise to the possibility of incremental rewards). Though it may sound odd coming from a lifetime entrepreneur, I am actually a very risk-averse person, and I appreciated the risk mitigation mechanisms baked into the traditional model. This isn’t just because of the fact that I would have to forego a salary for two years (though that was certainly a consideration), but also because my experience in Private Equity taught me broken deal costs are very common, and I didn’t have the personal capital to fund any broken deal costs should they have materialized at some point throughout my search process
  
  
• (Lack of) SBA Financing: Many self-funded searchers in the USA leverage SBA 7(a) loans, a program that provides prospective acquirors with 10-year, covenant-free debt that can cover up to 90% of the total purchase price (there is a catch, however: That entrepreneur must put up a personal guarantee, including their homes, cars, and all other personal assets). Though I likely wouldn’t have been willing to assume that risk had I searched and acquired in the USA, I chose to search and acquire in Canada instead, and unfortunately the Canadian government doesn’t offer a similar program
  
  
• Guidance & Coaching: Though I came from a Private Equity background, I can tell you from first hand-experience that being the junior associate on a 5-person deal team is an entire universe away from sourcing, structuring, financing, and closing a transaction entirely on your own. For this reason, I wanted a deep bench of advisors to help me with the hundreds of nuanced questions and considerations that were sure to present themselves throughout the course of any search and acquisition process. I’m thankful that my investors provided me with just such support
  
  
• Carry Structure Was an Objectively Attractive Proposition: When I learned that I could earn 25% – 30% of the upside on my transaction, I viewed this as an objectively attractive proposition for me relative to the alternatives available to my investors. When I was fundraising from high-net-worth individuals outside of the search ecosystem, countless prospective investors (almost all of whom declined the opportunity to invest) reminded me that their next best alternative to investing in my search fund was to invest in a highly diversified and proven Private Equity fund, where that manager would earn only 20% of the upside, and would employ armies of lawyers, accountants, associates and experienced CEOs to run the underlying assets. Situated against this “next best alternative” for my prospective investors, I viewed the search fund carry structure as fair at worst and generous at best for a first-time CEO who had never managed as much as a lemonade stand in his entire career
  
  
• Practical Considerations: Most important of all, I’m not sure I could have self-funded a search even if I had wanted to. As a recent MBA graduate with a very material amount of student loans at the time, foregoing a salary and personally funding all search and transaction expenses simply wasn’t an option for me.

Though I am an unabashed fan of EOS (driven largely by my own experience using it as a CEO between 2015 – 2020), there are several questions and considerations that you should think through when attempting to answer if, how, or when to implement it (or similar systems). This blog post (Implementing a Formal Operating System Like EOS or the Rockefeller Habits) contains my thoughts on some of the most frequently asked questions that I receive specific to implementing a company-wide operating system.

Broadly speaking, the Canadian and US search fund ecosystems are much more similar than they are different. That said, there are a few differentiating factors, which I’ve outlined below:

• SBA Loans: Many self-funded searchers in the USA leverage SBA 7(a) loans, a program that provides prospective acquirors with 10-year, covenant-free debt that can cover up to 90% of the total purchase price (there is a catch, however: That entrepreneur must put up a personal guarantee on the loan, including their homes, cars, and all other personal assets). Unfortunately, the Canadian government doesn’t currently offer a similar program.
  
  
• Sources of Credit More Broadly: In the US, there tends to be a wide array of lenders interested in financing search fund transactions, ranging from commercial banks to mezzanine funds to private credit funds and everything in between. In Canada, at least at present, credit tends to be limited to the large Canadian banks (RBC, Scotia, CIBC, RBC, BMO, and National Bank). Note that this doesn’t necessarily mean that credit terms are better in the USA than in Canada, nor does it necessarily mean that credit is more available in the USA relative to Canada.
  
  
• Formalized ETA Education: Within substantially all of the top 20 business schools in the USA, search funds are now a formal part of the second-year MBA curriculum. As a result, substantially all of these schools also offer ETA clubs, conferences, and other types of educational resources to students. Unfortunately, in Canada that is not yet the case, and as a result, prospective Canadian searchers are often introduced to the ETA model in contexts outside of their formal education (often through peers in the USA, through working on a lower-middle-market transaction at some point in their professional lives, etc.). As a result of this, freshly minted MBAs are a less common profile of searcher in Canada relative to the USA (where this is among the most common profiles).
  
  
• Market Size: While Canada is the second-largest ETA market globally behind only the United States (as measured by the number of new search funds raised per year), the absolute size of the market in Canada is still many multiples smaller than that of the United States.
  
  
• Legal Structures: In the USA, most Search Funds are structured as Delaware LLCs. In Canada, the LLC is not a legally recognized entity, and as a result, Canadian search funds tend to be structured as Limited Partnerships. This tends to happen in one of two ways: (1) The Canadian search fund is structured as an LP immediately upon inception, or (2) The Canadian search fund is structured as a Delaware LLC upon inception, but converts to a LP immediately before consummating the acquisition of a Canadian operating company. I have seen both methods employed successfully in the past, and both methods now have a number of precedents behind them.
  
  
• Asset Sales vs. Share Sales: In the United States, asset sales are very common in SMB acquisitions. In Canada, share sales tend to be the dominant structure, so prospective Canadian acquirors should prepare accordingly. One of the primary reasons why this is so is because sellers of Canadian businesses receive much more favorable tax treatment on their exit proceeds under share sales than they do under asset sales. More specifically, they are able to benefit from the lifetime capital gains exemption (if the company is a “Canadian Controlled Private Corporation”, among a handful of other requirements). More practically, this means that the seller is able to collect their first ~$1M of exit proceeds on a tax-free basis under a share sale, whereas that first ~$1M of exit proceeds would be fully taxable had the transaction been structured as an asset sale.
  
  
• Toronto-Centricity: Unlike in the USA, where no single geography tends to play a particularly prominent role, in Canada the majority of Search Funds tend to be headquartered in Toronto, and many of them (though not all, of course) exhibit a strong preference to acquire a company within a commutable distance of the city centre. Though this may serve as unwelcome news to prospective searchers looking to search from (and acquire within) the Greater Toronto Area, it should come as welcome news to those who have a less well-defined geographic preference, as the ratio of active searchers to available targets tends to be more attractive the farther one moves away from Southern Ontario.
  
  

In my opinion, the short answer to this question is a resounding “no”: Though there has indeed been explosive growth within the search fund ecosystem over the past few years (as measured by search fund formation activity, the number of active investors, the number of transactions being consummated, the amount of capital being deployed, and so on), the number of searchers in the market relative to the number of suitably sized businesses in North America represents a proverbial “drop in the bucket”. In any given year, the number of search funds actively pursuing an acquisition is likely measured in the dozens, whereas the number of small businesses that meet the size criteria of most search funds is likely measured in the hundreds of thousands.

If you have performed any amount of research on the types of businesses and industries that search funds tend to target, you’ve likely encountered a rather consistent list of characteristics that investors in our ecosystem tend to look for. Some of these characteristics include enduring profitability, recurring revenues, sticky products/services with high customer switching costs, a history of growth, good unit economics, and a lack of exposure to exogenous variables like commodity prices, real estate values, or the state of the overall economy.

If your first response to this list is that substantially every investor, across every asset class, is likely looking for industries that demonstrate such structurally attractive characteristics, you’re not wrong. However, the reason why search funds tend to specifically target these types of industries and business models is because, as much as possible, they tend to lend themselves reasonably well to being run by a first-time CEO, a dynamic that is highly specific to the search fund asset class.

Though there are plenty of examples of successful businesses with project-based revenues, significant commodity price exposure, low % (but high $) margins, and a non-recurring base of customers between any two given years, these businesses are almost certainly run by seasoned executives, each of whom has likely spent decades refining their craft as leaders and capital allocators.

Running a business that has highly recurring revenues is objectively much easier than running one that does not. Running a business at a break-even (or even slightly negative) level of profitability is objectively much harder than running one that has some EBITDA to work with. Retaining customers when you’re selling them a mission-critical product that represents a small percentage of their operating budget is much easier than retaining customers who can easily switch vendors if they receive a better price. Growing a business in a growing industry is simply much easier than growing a business in a saturated or declining one. Risk is simply lower in non-cyclical businesses than in cyclical ones, especially given that most companies acquired by a search fund have some degree of leverage within their capital structures.

Being a first-time CEO (often with no operating or industry-specific experience) is an incredibly difficult and overwhelming experience. As a result, search fund investors rightly target industries and business models that provide new CEOs with some built-in protections, such that they can take the time that they need to learn about their company’s problems and opportunities before they start having to make definitive decisions around them.