Stanford Study - Overlooked Stats & Implications

A lot of great takeaways from this iteration of the Stanford Search Fund Study - most notably, the interest in search funds continues to grow and returns have continued to be strong for search funds as an asset class. That said, I thought I'd highlight a handful of glaring stats and implications that stood out which I haven't seen others reflect on so far. I'm self-funded, so my comments are slightly geared toward that form of ETA.

###-###-#### LOIs being signed by searchers on average! I can't recall and couldn't find this being reported on in the past. I've often heard it can take searchers three signed LOI's to close as a benchmark. For self-funded searchers especially, keep that in mind as you think about how much capital, time, and runway you might need to get a deal closed. While not perfectly comparable, the SIG self-funded study showed 2.4 executed LOIs on average for those who close. Speaking from experience, broken deals are painful, but if you're on your third you may just be one away from closing on your acquisition.
"These searchers signed on average 3.6 letters of intent (LOI), the first of which was signed, on average, 7.8 months into the search."

2) The average multiple from traditional searchers is an eye-popping 6.9x EBITDA, and UP 0.7x since the last study in 2022 - this is for businesses with an average size of $2.2M EBITDA when excluding valuations based on a revenue multiple. Notably this multiple is also roughly in line with the average including revenue multiple-based acquisitions. This is an incredible datapoint to me. For all of the self-funded searcher, ETA, and independent sponsor discussion around acquisitions needing to be completed at 5x or less, traditional searchers are acquiring similarly sized businesses (and likely similar type/industry), but at much higher prices. Keep that in mind as you think about your ability to win a banker/broker led process and raise the capital necessary for that acquisition. I would be curious to see how this breaks down by industry and size range (<$1M EBITDA, $1-1.9M, $2-2.9, $3-3.9, etc.).
"The median purchase price of an operating company declined to $14.4 million in this study from $16.5 million in the prior report, representing a 7.0 multiple of EBITDA for companies with an EBITDA margin of 27%, growth rate of 25% and 34 employees (all median amounts, Exhibit 5)."

3) ~68% of traditional searches result in relatively poor/unwanted outcomes.
37% no acquisition
19.5% of total result in a loss (63% acquire X 31% loss rate)
11.7% of total result in an underperforming low-return of 1-2x (63% acquire X 69% gain X 27% 1-2x ROI)

To this point, I'll also note that the 'No Acquisition' and 'Loss' buckets are both up consecutively vs. the last two iterations of the report - in aggregate, +7% vs. the 2020 report - this is for all search funds since 1984, meaning more recent searches are skewing even higher towards these unwanted outcomes than in the past. Importantly, this also excludes self-funded and other forms of ETA. For what it's worth, I'll note that having a positive return is not a horrible outcome, but when you consider the amount of money returned to investors and to the searcher for a likely 6-10 year commitment, it is significantly underperforming vs. other investment alternatives and potentially income/job alternatives for the searcher. Not acquiring is still always going to be a better outcome for searchers than acquiring and losing money, personal guarantee or not.

4) Given the exponential growth in searching and ETA in the past four years, it is notable that this study still largely encompasses the pre-COVID vintage of searchers. Outcomes from the 2022, 2023, and 2024 acquisitions won't be clear for another few years still.

All of this is to say, searching, acquiring, operating, and exiting is HARD. Very hard in fact and on average with outcomes that can deviate from the dream and top returning searches significantly.