What protects search funds from investors stealing deals?

searcher profile

June 11, 2024

by a searcher in Toronto, ON, Canada

If I am running a search-fund and present a deal I found to my investors, what stops them from taking the company I found and telling a friend or relative about it? Especially when investors are potentially investing in many funds, what stops them from telling someone else (maybe another search fund) about the company?

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commentor profile
Reply by a searcher
from Harvard University in Denver, CO, USA
A) Sign the (non-binding or financing-dependent) LOI before presenting the deal to investors, B) mask the prospect name and identifying details which investors shouldn't need in most cases, C) work with only trustworthy investors, and/or D) be the person the seller WANTS to sell to. The last one is overlooked by many buyers since they think the 'customer is always right' as the buyer and treat the seller like it's just a transaction. Most sellers have a choice of multiple bids and they care to varying degrees about what happens to the business and their employees after the transaction. Assuming the financial offers end up being within a similar range (which they typically do), then if the seller prefers your investors over you as the operator then that is sign you've not made a good impression on the seller.
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Reply by an investor
in Piscataway, NJ 08854, USA
Agree with those above who have said it is not productive to be too worried about this - that time and mental energy would be better spent on getting to know/gaining confidence in the folks on your cap table. Also agree with the ide that reputational risk is too great for most investors to consider this (I'm sure there have been some unscrupulous ones here and there, but by and large I have found the Search community to be very ethical.) At least for us, stealing a deal is a course of action that would never even occur to us, firstly because we have high ethical standards, secondly because we our reputation is extremely important to our business model, and lastly because we are not looking to operate a business - that is why we sponsor Searchers to being with.
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