We are used to seeing and reading in the media terms such as private equity, family office or business angel. But does the same happen with Search Fund? Do you know what it is? And the most important thing, do you know how it can help your company?
The concept of investment is very developed in the United States and is beginning to become much more relevant in Spain. Search funds can be a real alternative for companies that need investors or alternatively, for entrepreneurs who want to buy a business.
Before knowing how they contribute to the growth of companies it is important to know who forms a Search Fund. They are comprised of a group of investors that deliver money to one or many professionals (or in some cases entrepreneurs) so that they, together, are dedicated exclusively, during a certain time frame, to looking for businesses in which to invest. This type of investor helps, first of all, to finance the search and second, the investment or the purchase of the company.
In relation to the volume of investment that each participant investor inputs into the Search Fund, it can vary between 20,000 and 50,000 euros, with a the intention to raise in total between 150,000 and 300,000 euros. This money, generally, is used to pay the wages of executives and cover costs during the search process. In return, the investors have the right, but not the obligation, to invest pro-rata in the fund of the of the target company.
Addressing what has been explained, the investors’ money is applied in two phases. The first stage is where it is deposited in order to finance the search process, and the second is for the purchase of the company.
The investment made for the search process is not “lost”. This capital is usually converted into shares for the company with a discount relating to the value of the acquisition to the other investors. Through this strategy the company seeks to compensate the promoters of the Search Fund due to the financial risk assumed with the work.
This is highlighted by the fact that the investors in the Search Fund usually protect themselves with priority clauses in return for the investment from the entrepreneur or fund promoter, in the case of not fulfilling the profitability objective. This type of investor can request preferential shares or even demand a minimum return on capital, in fact only once they have received a return on their investment, the promoting entrepreneur can obtain his corresponding part.
Once the purchase is carried out, the Search Fund entrepreneur usually receives between 15% and 30% of the company, in three phases:
1. Purchase of the company
2. Second stage in which the entrepreneur continues as an employee (between 4 and 5 years, releasing shares year by year).
3. The third stage arrives once the targets are reached. It is usually by establishing objective outlines within which the investors yield more capital according to whether the annual profitability exceeds 15%, 20%, 25% or 30%; other times it is calculated around the EBITDA accumulated or whether the subordinate debt will be paid.
In the case that the investors release shares according to the profitability that the investment might generate, it is possible to agree with them that if the company is not sold, after 5 years, a valuation will be carried out by an independent advisor and the obtained profitability will be calculated to determine to whom the capital corresponds.