Rob Johnson explains funded search "" a way in which young entrepreneurs can find others to pay to set them up in business.
Kirk Dodson is a highly talented young entrepreneurial individual with a few years work experience and nearing completion of his MBA. He says his aim is to run his own business and he wants advice on how best to reach that goal.
What do you tell him? Most people would strongly advise him to get more industry experience, including managerial, preferably in charge of a small company or a division of a larger company. Then, say the wise counsellors, he will be in a position to run his own business.
Certainly that is appropriate advice for many people but for some (like Kirk) there is another alternative "" buying their own business right away.
Rubbish, you say. How can anyone with little industry experience, no real managerial experience and little capital (indeed still in debt from financing an MBA) be serious about buying and running a business? It is not so far-fetched as it sounds. An increasing number of graduating or recently graduated MBAs have found there is a quicker and more rewarding path to get into business for themselves "" using a funded search to find and buy a business to run.
In a funded search an entrepreneur raises a search fund (say £100,000) from a group of individual investors (for example 10 individuals investing £10,000 each) to pay the expenses of the search and a nominal salary during the search period (say 18 to 24 months). Working full time, the entrepreneur researches target industries and searches for a company to acquire.
Once a company has been identified and a deal negotiated with the seller, the search fund investors have the option "" but not the obligation "" to invest pro rata in the acquisition.
If an investor chooses not to invest then his original investment rolls over into the acquisition on the same basis as the new investment funds. As part of the deal, the entrepreneur (now the CEO) receives equity in the company "" usually a combination of shares at completion of the acquisition and additional shares based on performance.
Several key factors are necessary to make a funded search work.
First and foremost, the young entrepreneur must have the commitment and the talent to run a business. From the investors point of view this is the real risk in the deal "" can this person run a company?
The criteria for a target acquisition must take this into account, which means the searcher must find a business that does not have a lot of inherent risk in it. This may mean a boring business but sometimes boring businesses turn out to be fun businesses and even highly profitable when properly managed.
Has the concept worked? I know of 18 people in the US and two in the UK who have raised search funds all are either now running their own companies or are searching. Two of the US entrepreneurs have sold their companies, producing generous returns for their investors.
What must the young entrepreneur bring to the table? Enthusiasm, commitment, persistence and the ability to run a business "" now.
What does the investor buy in the search fund?
Essentially, an option; then, the opportunity to be involved with a bright young entrepreneur in what may be his or her first big winner.
