European search - self funded vs traditional?
March 08, 2024
by a searcher from Ivey Business School at Western University in Amsterdam, Netherlands
I have had about 20 conversations with buyers (searchers), advisors and brokers, and funders across Europe. It seems there are quite some varying views on going down a traditional vs. self funded search with a business partner. My background: fractional CFO for software businesses, former VC and PE investor, worked in banking and corporate finance in the last recession.
I am looking to connect with funders (i.e. LPs who are funds or individuals) who have a proven track record of backing successful searchers outside of the US + exited buyers (searchers) of small businesses in the business services space - accounting, tax or legal. Referrals and strong (evidence-backed) opinions are highly appreciated!
from Ludwig in München, Deutschland
I made the error of not considering the timeline in my investor search and mixing market understanding too much with the investor search - apart from the economics, the reason I ended up with a self-funded search. Excellent searchers close their funding in a few weeks, since everyone wants to invest. Investors will simply skip you if you need too long to raise funds, and the clock starts ticking with the first contact - I did not see this effect so strongly in VC and PE, where (according to my limited experience) you count in months, run rate or closing late may even be better due to the growth trajectory. So, it's better to go with a big bang and not to search too specifically for an investor profile, since this will cost you (on average) time you do not have.
However, if you are looking for investors, simply check the database here on Searchfunder as a starting point. Connecting with (in my case, German) searchers and investors on LinkedIn and checking/contacting their contacts also helped me a lot (basically, this is something like a "weak referral" since you see at least the active persons in the market and it helps in cold approaching).
in Frankfurt, Germany
I have decided for a self-funded structure for following reasons;
1) I would argue that my lifestyle is far from expensive, I have no kids, not high fix costs etc. which leads to me being able to comfortably finance it for 1-2 years without needing a good salary (which I see as the #1 reason to go for a traditional SF).
2) Traditional Search Funds usually have better structures for investors also being advisors (not always the case but based on my conversations its pretty common). Given I come from a PE and before entrepreneurship background I am experienced in M&A transactions as well as managing people (which I think should be the basic skillset to have if you decide for a self-funded search fund). However, I also have an advisory board to leverage expertise and network.
3) We have (a rather soft) sector focus on IT-Services. Its not a must for us but we are focusing on that space. In Germany you have an investor gap up to 2m EBITDA before other IT-Service groups are interested to acquire you as an add-on. However 1-2m EBITDA is usually too large for private buyers which is the gap we are trying to close by consolidating them.
If you decide for a self-funded search fund, raising on a deal by deal basis will certainly take longer and comes with much more entrepreneurial struggles than knowing your funding is already safe. However, you will end up owning much more equity.
There are great arguments for both types but in the end it all comes down to your risk aversion and personal means / lifestyle.
Hope this helps!