Should I let friends & family into my traditional searchfund?

searcher profile

September 15, 2021

by a searcher from Massachusetts Institute of Technology - MIT Sloan School of Management in Sydney NSW, Australia

I’ve read a lot of advice about limiting the exposure to family and friends on on your cap table.

If there are individuals whose advice you value, who might be able to write the cheque for the search capital, but you know won’t be able to write the cheque for the acquisition capital - should you try to avoid these investors all together? Or can you spare some of your search capital for these cheques?

I understand that the cons of this might be that I would have to find further capital at the time of acquisition, but if it means getting a trusted advisor/small business operator on the advisory team early, isn’t that a good reason to let it happen?

Thanks for any/all advice here

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Reply by a searcher
from Harvard University in Boston, MA, USA
A few considerations:

1. If your F&F don't have the ability to write the follow-on check, their expected returns are reduced and search investing may not be a good fit.Investing at the search fund stage gives you both stepped up capital as well as a call option on the future business.If you are unable to use the call option due to lack of funds, then you're getting less for your investment than an investor with both a step-up and a call option.

2. If you give units to F&F, who gets excluded?It is one thing if there is a silent capital partner waiting in the wind, but I would be hesitant to take F&F money if it meant that I couldn't take a highly value added investor.

3. Not all F&F are created equal - general level of sophistication should be considered.If the deal goes south, do you have a high degree of faith that the F&F will be able to move on easily without impacting your relationship?

4. If they are F&F, will you be able to get their advice without taking their capital?Do you believe that they will be meaningfully more engaged if they invest in your fund (and would additional engagement be a good thing)?
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Reply by a searcher
from Mount Royal College in Calgary, AB, Canada
A lot of factors to consider if inviting family and friends. Is their portfolio structured in such a way that risk is kept to a minimum by private investment - primarily one such as a searchfund. Ideally, one's portfolio should contain 10-20% (depending who you talk to) of alternative assets, including real estate, and that is exactly what a searchfund is. On top of that, what is their risk tolerance, are they ok if the money is lost? And their time horizon for when their life needs those funds. And finally - is your friendship or family connection likely to survive an adverse investment? Is that risk worth it? If it is to you, maybe you aren't quite the 'friend' you think you are.
So if they are going to take out a HELOC to "help you out" on your search, or going to be asking you every month when you're going to pay them back 'cause little Johnny needs braces, you better find someone else.
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