New venture to help young entrepreneurs buy businesses from baby boomers

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A new venture is making its way into Australia, providing young entrepreneurs the opportunity to find and buy established businesses. The concept of a “search fund”, one that is fairly new in the Australian business landscape, is a niche private equity vehicle that brings together an entrepreneur with a team of experienced and well-financed investors. The aim is to buy and operate a small to medium enterprise with revenues of between $5 million and $50 million.

This concept is being introduced by SMEVentures which just completed its first transaction in Australia and is calling for eager entrepreneurs to participate. In turn, those entrepreneurs will receive access to capital and mentoring while providing business owners with an exit strategy.

According to Jake Nicholson, the Managing Director of SMEVentures, the search fund model would become increasingly popular in Australia as more baby boomers look to exit their businesses over the next decade.

“More than 80 per cent of privately-owned Australian businesses have no succession plan because there are so few options for the owners,” Nicholson said. “A search fund gives the owner the option to retire, knowing their business is in good hands and is well placed to go the next level with a younger, motivated and well-funded management team.

“We buy great businesses to keep them great,” Nicholson added. “We have no intention to rebrand, relocate, close down, or gut the businesses we acquire. We appreciate the importance of legacy, and we aim to be good caretakers of that legacy.”

While a relatively new concept in Australia, search funds have become increasingly popular in recent years in the United States. According to research by Stanford Graduate School of Business from 1984 through 2019, at least $US1.4 billion of equity capital was invested in traditional search funds and their acquired companies, generating, in total, approximately $US6.9 billion of equity value for investors and an estimated $US1.8 billion for entrepreneurs (searchers) so far.

“In most traditional private equity buyouts, the buyer incentivises the current CEO and management team to stick around for a period. Then, when appropriate, the buyer may source a new CEO or management team to replace the legacy team,” Nicholson explained. “Search funds, by contrast, start with the management solution (the searcher) before even identifying the target company…The concept of giving the future CEO the entire responsibility of sourcing the buyout opportunity is pretty unique to the search fund model.”

Nicholson added that the quality of searchers was the most critical factor in the success of a search fund investment, and MBAs typically had the right experience, motivation, and broad-based skills.

“Top-tier MBAs are more likely to join large brand-name firms, and relatively few join SMEs, especially in the unsexy industries of which the search fund model is so fond. Therefore, there may be opportunities to bring ideas and tools to an SME that have not been previously implemented at that SME or perhaps even in the industry,” Nicholson concluded.