Search fund – What it is, definition and concept | 2023

The search fund or search fund refers to a group of investors who provide capital to one or more professionals, so that they look for companies to invest in. These professionals can be managers or entrepreneurs.

In other words, they are new forms of investment in which talented entrepreneurs obtain money from one or several investors. This money is used to finance the search, selection and acquisition expenses of a company that has a high potential for growth and success within the market.

Naturally, the search fund is an investment fund involving two players. On the one hand, there are investors who provide the capital to finance the costs. On the other side, there are the entrepreneurs who are in charge of finding the funds first.

They then use this money to search for, identify, and acquire a new business. To finally take the acquired company to a higher level of development and growth.

It is important to mention that search investment funds are also known as Search found. It is a modern way of investing that arose in the United States between the years of 1930 and 1935. Especially in the business schools of Harvard and Stanford.

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Who are the actors in a search fund?

Importance of search background

Undoubtedly, this investment option’s main objective is to search for and acquire companies that are perceived to have great growth potential. All this is financed with the capital provided by the group of investors.

Search investment funds are characterized by being used to make a single acquisition. Also, because the entrepreneur who occupies the role of Searcher or search engine becomes the top executive of the organization.

This form of investment is very important in the field of business. Since, the investors who contribute the capital choose the company in which they want to invest. But, in addition, they choose the people who will take over the management of the company.

Of course, this is very beneficial for the investor and for entrepreneurs. Since, jointly, capital and human talent are used to get more utility from the money invested. Becoming great initiatives and investment projects.

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Stages that are followed in the search background

Stages that are followed in the search background

The most important steps followed by the search fund are:

1. Search for the initial capital

First, you go through the stage of seeking initial capital. In which the actor who works as an entrepreneur looks for investors to get the initial capital. Generally, he looks for between 15 to 20 investors.

Of course, at this stage, the group of investors finance the expenses incurred in the search for business options. To do this, a person or a group of people is chosen to carry out an investigation of the business environment. In the same way, these people establish the necessary contacts to find the most suitable companies for investment.

2. Identification and acquisition

Second, the identification and acquisition phase occurs. In this phase, the entrepreneur after the search process identifies those companies or businesses that may be more interesting.

Next, we proceed to identify the most attractive one. To finally negotiate the purchase of the company that he hopes to acquire with the capital provided by investors. This phase ends when the company agrees to the proposed deal and accepts the purchase proposal.

3. Management process and growth

Thirdly, the process of management and growth of the acquired company takes place. This process begins after having made the acquisition of the selected company. Additionally, the investment fund selects the people who occupy the most important positions within the company. Positions such as the CEO, the president and managerial positions.

Normally, the entrepreneur called the Searcher goes on to occupy the position of CEO. That is, he becomes the top leader of the organization. Likewise, he begins with the development of the growth plan for the acquired company.

This plan is developed together with the investors who become part of the board of directors. Indeed, in this phase the process of transforming the acquired company to make it more profitable begins. The purpose is to take it to a higher level of growth.

What characteristics do companies that are of interest to search funds have?

Companies that are interesting for investment by search mutual funds must:

  • Have a differentiating element: The differentiating element can be the idea or the business model, the human resource, the product, the service or any element that makes it different.
  • Companies must be innovative: Innovation must be an essential factor in these companies. Especially in the technological aspect, but innovation must be present in all the processes and functions of the company.
  • They must be profitable: Your primary goal should be to achieve maximum return on invested capital. Therefore, your cash flows must be positive and stable.
  • Locate in large, high-growth markets: That way they are interesting for any investor.
  • Your business model must be attractive: The business model must be easy to understand. Likewise, having a large, highly diversified client portfolio and reaching a high income level.

In conclusion, it can be stated that a search fund is an excellent investment option for entrepreneurs or managers who have experience in the business area. Since, search fund investors support these entrepreneurs with the capital they need. Especially to buy companies with high potential for growth and performance.

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