The 9 Criteria for a Search Fund Business

searcher profile

May 07, 2020

by a searcher in New York, NY, USA

  1. Recurring Revenue A consistent pattern of repeat business from existing customers Get a customer list and count the names that drop off each year. Max 25% churn per year

  2. Customer Concentration Below 15% per customer

  3. Key Man Risk No business where the sales rely on the personal relationships, identity, or knowledge of the seller A Standard Operating Procedures (SOP) manual greatly reduces this risk

  4. EBITDA Margin Above 15%

  5. Commitment to Sell Find the reason for the sale - some external force

  6. Low CapEx A business that is not capital intensive - tracked by returns on tangible capital Look for after-tax returns on tangible capital of 20% or more

  7. High Barriers to Entry

  8. Low Operational Complexity
    Find companies you could explain what they sell in a sentence.

  9. Growing End Markets Sector is growing long term by 2x GDP

"Secular growth trends that evolve over 3-5 years or longer are the prime drivers of superior, long-term equity returns and that buying companies at attractive valuations helps maximize long-term results." - Will Thorndike


- Bakari Akil, graveshallcap.com

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commentor profile
Reply by a searcher
from Temple University in New York, USA
Interesting - doing a quick search of the IBISWorld database, the list of 1400+ industries quickly gets narrowed down by looking at industries with HIGH Barriers to Entry spliced with GROWTH Life Cycle stage. In total, only 51 fit these criteria. Some surprising ones - Coffee Creamer Production, Ambulance Services, and Pet Insurance.
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Reply by a searcher
from Washington State University in Spokane, WA, USA
I'm new to Searchfunder and just came across this post. Seeing that this post is 3 years old, I'm curious if any of the 9 criteria points would be amended for the current market dynamics we're seeing today.
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