Episode: 477 |
Tushar Shah:
Intro to Search Funds:


Tushar Shah

Intro to Search Funds

Show Notes

Tushar Shah is currently a Managing Partner at Kinderhook Partners, LLC.  Prior to Kinderhook, Tushar was a Principal at Geocapital Partners, a leading venture capital firm, a strategy consultant with the Monitor Group, where he led a range of projects in New York, London, and Tel Aviv; he is a CFA charter holder and he received a B.A. in Economics from Williams College. In today’s episode, Tushar explains the fundamentals of search funds. To learn more about Tushar’s company, visit KinderhookPartners.com or reach out to him on LinkedIn.

Key points include:

  • 00:30: What a search fund is
  • 10:51: Who can apply for the fund
  • 15:53: Examples of business and services acquired
  • 28:12: Assembling a pool of investors


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  1. Tushar Shah


Will Bachman 00:01

Hello, and welcome to Unleashed the show that explores how to thrive as an independent professional. I’m your host will Bachman. And I’m here today with Tushar Shah, who is the founder and managing partner at Kinderhook. Partners, which kind of funds and manages several search funds to shark Welcome to the show.


Tushar Shah 00:21

Hey, how are you?


Will Bachman 00:23

Great. So, to start, let’s start by, tell me what is a search fund.


Tushar Shah 00:30

Great to search funds are a form of entrepreneurship founded by and sort of first formulated by professor named Kirk Groesbeck, back in 1984, at the Harvard Business School. And the idea is basically, for a small number of investors to fund an individual whose a business school typically just started, initially was just sort of right out of business school. So initially at Harvard Business School, you know, someone is sort of say, doesn’t have a rich uncle to fall back on. And so find tenant investors that would give a small amount of money to Phil, to pay for a basic salary for this searcher for a couple years, as well as some diligence expenses and travel expenses and daily expenses. And to give that person then time, a couple years to go and try to find a small business to acquire. And in some ways, it’s sort of they’re basically small leveraged buyout transactions. So typically, service businesses, anywhere from, you know, 10 to 50 employees, typically one to 3 million, 4 million, 5 million of EBIT, da. And the idea is often these businesses are owned and run by the same person. And often they don’t have, you know, a child is going to take over the business or someone to give it over to, and sort of, would have a hard time finding someone to sell the business to. And so here’s this young, very energetic and ambitious Business School grad that wants to find a great business to buy and to run and manage. And so if, when the searchers find a business like this, and an opportunity to buy a company, those 10 initial investors that sort of gave the money for the search fund, they have the first right to invest in that deal. And the searcher then becomes the CEO of the new company, or the company, and gets the right to own equity, typically, somewhere between 20 and 30% of the upside, when the money is returned back to the investors that they they put up to buy the company. And so it’s been, it started out with just a handful of searchers per year in the in the 80s, up until probably the mid to late 90s. And then it started growing more. And now there’s sort of well over 50 searches a year, that are out there, doing this activity, trying to find deals. And it’s also expanded internationally. And so now there are searchers, in many countries in South America, many parts of Europe, even in Japan, Australia. And it’s a really exciting field, and investors have really benefited from it returns have been over 30% compounded. And this is going all the way back, you know, for many, many years, and it’s held pretty and very high level, which has been great, much better than sort of you would get if you put your money in the stock market or some other asset class. And it’s obviously a wonderful thing for the entrepreneurs that that are able to come out of business school with relatively little experience often and be able to actually run and build a company. So let me stop there and see where you’d like to sit the conversation.


Will Bachman 04:07

Well. So how do the exits for the investors typically work? Let’s say that the searcher has found a business that he or she wants to stay with for the longer term? Do the investors is there typically some, you know, you know, thing that happens where they’ll sell it to a private equity firm or so what would typically happen after you know, several years of the searcher buying the business and being successful growing?


Tushar Shah 04:40

Yeah, so typically, the expectation going in is that this is sort of five year plus kind of time horizon sort of opportunity. And so the searcher will come in though, take over the company, get to know it, hopefully grow the business, improve the business, make it much bigger and more profitable. And often they’re too Ways of money going back to investors there can be recaps. So debt recaps where a company will go and raise a bunch of debt and give that capital back to the investors. And that’d be a form of getting capital back from the investors. Or, as you mentioned, certainly there can be a sale of the business as well. And there have been many, many examples now of, of companies, you know, getting sold to other private equity companies or firms or strategic acquirers. And in a handful of cases, even a couple of cases, even, you know, some of these companies going public, as well.


Will Bachman 05:37

And actually kind of surprised that the number of these is as low as 50 per year, it seems like a small number of people searching for a business to buy in the whole United States, or is that number not including people that are sort of not under this official plan, but you know, people who are just out there looking to buy a business, maybe on their own, that doesn’t quite count this as people that are funded by a group of investors, specifically for this purpose, I guess?


Tushar Shah 06:07

Yeah, I mean, for sure, no, you’re absolutely right. If you included all the people out there looking for businesses, that number be much, much higher. And in fact, there is a sort of class of other folks called self funded searchers, which typically are typically using money that they’ve saved or whatever to, you know, help. Or maybe they have a job on the side while they’re out there looking for, for a deal. And those deals, however, those investors, sometimes those deals are much smaller. And they certainly often don’t have sort of this group of search fund investors that have been doing this kind of investing for many, many years, sort of backing them. And there’s pluses and minuses of that. But yeah, no, I’m talking about just this very narrow set of folks that are out there searching in this very particular way.


Will Bachman 06:53

And so let’s say the searcher finds a business that they want to buy. But if the investors don’t like the business, I guess sometimes not all 10 of them are so would, would decide to invest and and how does if I guess if they don’t like the business, they don’t invest. And then Tough luck, they they helped fund the person search, but but then they just, they, they just walk away from that one.


Tushar Shah 07:18

You have also another nuance to this is, so the initial capital going in. So typically, let’s say it’s 10, investors putting in $40,000 Each, which is sort of a rough benchmark for a single searcher. So that’s, that’s $400,000. So what happens at the time of the deal, to basically to pay those initial investors that put up the money to do it, an adequate return that $4,000 is stepped up by 50% at the time of the transaction. So and either if you decide you don’t want to invest, typically, you’ll get your money back. So you’ll if you put 40,000. And let’s say you get $60,000 back, so you make a bit of a return there, when there’s when there’s an actual deal that happens. And but if you are investing in a deal, then typically that money that $60,000 of value gets rolled into the transaction. And so and so that’s how it works. And so often, almost always, there’s going to be a handful investors that don’t invest in the deal. And usually that gap is made up by the rest of the investors that do want to invest or put more than their share in or there can be gap investors that can be there’s a pretty wide network now of investors that have done these kinds of deals over time. And and, you know, the searcher will call around and find other investors to fill up the gap.


Will Bachman 08:42

No, so it sounds like these businesses are a little bit too small for even the smaller private equity firms. Is that right? Is that why there’s they’re kind of in this bit of no man’s land where they’re maybe too small for traditional lower bid market? PE firm?


Tushar Shah 08:59

Yeah, it’s sort of I mean, that the history and definitely, examples are much smaller and much bigger businesses that are also acquired to this model. But the right up the middle, you’re exactly right. Typically lower middle market, private equity is kind of bigger, typically they’re finding there’s one eye for businesses that are a bit bigger. And again, there’s another nuance which is that for private equity firm to buy business, they typically you know, they need someone to run the business but they don’t typically put one of them doesn’t become the CEO one of the private equity professionals don’t don’t become the CEO of the company typically. And so they need to go fight they need to typically if the owner is the CEO of the company, they’ll need to go recruit a new CEO for the company, right? Because often or though the CEO will have to stay on for three to five years and build the company up and help the private equity firm then flip you know, sell the company themselves and make money for themselves. And so there can be this And often, that’s why the the model works is the search funders can often find really deals that you can’t find otherwise, because they’re filling this unique gap where both the deals are kind of small as you’re describing, but also, they can fit the, you know, they can become the CEO themselves. And typically, for private equity firm for a small business like this that they’re trying to buy, it’s very hard for them to you know, they’re not going to go find a Harvard Business School grad, typically, that’s going to be all excited to go, it’d be really hard for them to find someone like that to come and run a business of this size.


Will Bachman 10:30

Is this, you mentioned that it’s graduates of business schools, is it typically kind of fresh graduates that do this? Or are there people that maybe go do consulting or banking or some other thing for two or three or five years and then decided to do a search fund? Or is it primarily just recent grads?


Tushar Shah 10:51

It’s, you know, initially, it was almost entirely Stanford Harvard business school grads, that we’re doing it and almost entirely fresh sort of right out of business school, I’d say for sure. Over the last, you know, 10 years, it’s it’s the pool has broadened. And they are now as you’re describing, you know, folks that are, you know, some may have not even gone to business school, but they’ve had operational experience that maybe a little bit later in their career. And they’ve done search funds. And one of our most successful investments in the search fund world was someone that, you know, he was later in his career. I mean, I think it was in his early 40s, when he started a search fund, which is, you know, on the older end for search funds, search funders,


Will Bachman 11:39

you gave a quick snapshot, the beginning that it’s often services businesses, but give us a few get tell us a little bit more about the types of businesses that people end up finding and acquiring, and maybe give us some specific examples. You can be sanitized or unsanitized.


Tushar Shah 11:57

Yeah, absolutely. So, you know, the, yeah, in the very early days, or all kinds of businesses getting acquired. And over time, that people that were in this world, figured out that the highest hit rate, you know, where you found a business, often, you know, it takes a searcher, often they don’t have a lot of operational experience. They’re obviously very smart, very bright, very, you know, capable folks, but they need some time to get their sea legs running a company. And what the surface investors kind of the end this sort of community find out was that recurring revenue service businesses tended to be the best fit for this model. And you know, so if you have a recurring revenue business, where you don’t have to go get the customers every month, every quarter, that’s a much more stable business, it’s a much easier business, typically to transition into and transition management from one person to the next. And so that’s been, you know, the biggest bulk of deals have been sort of those kinds of businesses recurring revenue be typically Business to Business Services type companies. But that’s not the only kind of company for sure. That have been bought in this model. And just to give you, I mean, the most successful of all the search funds today has been a company called Asurion. It’s one that isn’t, you know, they’re not public, people will know them typically, but many people will know this service. They are the folks that provide cell phone insurance. So if you buy a phone, you know, get an iPhone at at&t or Verizon or wherever you get your cell phone service. Typically the provider of the insurance for that phone that many many people buy is a third party provider called Asurion. And and it’s a really interesting story, shall we, I can give a quick snapshot about day to one search funder and then kind of be paired up with another I think business school friend of his, they acquired a roadside assistance company in the late 90s. So this was a company literally just you know, they it’s a third party service, you know, if you’ve, they would say I can wear who they’re selling the service through, but if you your car got stuck on the side of the road, you call their number and they would data network of pick tow trucks and stuff that would come by and help you out. And as part of that business, they started providing a similar service for if you remember, a long time ago in the early days of cell phones, there were these brick phones that you would like literally like this big you know, box like devices that you could put in your car and you have a car phone right in the car and and these guys started servicing those devices. And and that morphed in over time. This is after they acquired the company to being a self Once kind of, you know, went from 1% Penetration to basically everyone having a cell phone, they rode that wave and they were able to secure the contracts for all the major carriers to be the the back end provider for insurance services on these phones. And so that company went from a very, very small company that when they were there was acquired to being, you know, just a massive company today with huge, you know, revenues and profits. And that’s a company that never, you know, did had many recaps and investments, private equity firms, and so on. But it was never, you know, sold, the sort of the, the same management team was still there running the company many years later.


Will Bachman 15:43

What are some other examples? give me examples of service, recurring revenue services, businesses, b2b services, what are other examples of that?


Tushar Shah 15:53

Yes, I’ve got a couple of interesting examples. So that are just in our portfolio of companies. So there’s one company called canned source, which is a company based in Denver, they provide cans, so if you, if you’re a craft brewery, and you want to sell some cans of beer, of your beer, you can’t go ball is the big manufacturer of cans, if you get a coke can or a beer can, it’s likely made by ball as a couple of very large companies balding by far the biggest one. And you need to be ordering those in, you know, the truckload quantity, you know, huge numbers of those cans, because the way that they’re made is that kind of got made, they get made, and they get printed at the same time. And, you if you want a small run of you know, 1000 cans or 5000 cans, you can get a ball and get them. So what this company does is they get blank cans essentially from Ball, they put a sleeve on top of the can, and then they send those cans over to the, to the winemaker, the now there’s a lot of wine, you know, that’s being sold in cans, beer manufacturers can boot, I mean all kinds of beverage folks. And there’s been a really explosion of companies, if you go into any store or supermarket or wherever you might get these kinds of beverages, you’ll you know, you will notice right there was just an explosion of different small companies selling these products. And that’s what cancellers provides is an outsourced service. And we were fortunate to acquire the company a couple years ago, and actually was one of the you know, some companies obviously, ever, some companies really had a hard time through COVID. And there were some beneficiaries and this company was a major beneficiary is more and more people were obviously at home consuming a lot more beverage at home, not, you know, at the bar at the brewery and, and so they had, you know, real surge in demand through that period and still continues to today. There’s another company, it gives you a sense of geographic breadth as well called New assist. It’s a software company based in Brazil. So this is a company that provides customer service software, if you’ve, again, most listeners a little bit to consumer websites, or you know, if you’re buying any kind of e commerce website, etc. Typically, they’ll be a little chat window there that you can interact with the customer service people. And that’s this the software that this company provides. So it’s for a lot of E commerce companies, even some b2b service type businesses, they provide the software functionality that allows the communication between the customer and the provider. Yeah, that doesn’t scare a couple examples. Happy to give you lots more.


Will Bachman 18:45

How do searchers typically go about finding these smaller businesses to acquire?


Tushar Shah 18:54

Yeah, that’s a great question. So it’s, you know, the early days, it was a lot of brute force dialing for dollars, you know, literally picking up the phone, getting lists of companies and calling them up and trying to get some CEOs on the phone. You know, as with the internet, and sort of so much information being available online, and somebody lists and things available online, often. The Searchers have a whole range of communication methods by which they kind of reach out to small businesses, they often will have a team of interns that they recruit to help them in this process. And so often there’ll be a campaign of literally physical letters, email, phone calls, internet advertising of various sorts, to try to drive business owners to see their pitch and, and to ultimately drive to a phone call of some type between the searcher and the you know, the CEO of small business and And then it’s you know, it’s like any kind of sales process in a way, I mean to literally do searchers, or, you know, contacting 1000s and 1000s, of businesses and of those, they will have, you know, 10% of them to get on the phone and have those, you know, 10% of them might be interested in some kind of deal process, and then, eventually, you know, hopefully one of those turn into turn turn into a deal.


Will Bachman 20:26

And what have you seen as successful strategies for people do? Is there typically, like a successful searcher will have maybe come up with a hypothesis around a specific sector that’s attractive and look for businesses there? Or do they just kind of spray the world looking for, you know, any kind of, you know, business in a particular geography? Or how, you know, how do you? How do you kind of how did they go about, you know, filtering the whole universe of the 1000s and 1000s of businesses out there?


Tushar Shah 21:01

Yeah, no, absolutely. I mean, I, you know, the universe is probably in just a state some of this probably a million targets, right, like, literally 20 million small businesses, depending on how you count them, and the ones that could be of the scale, and so on. And so, so obviously, you know, you got to have some method to decide, we’re going to focus our efforts. So there’s two broad camps, there are some folks that go down to industry focused search. And they decided I want to buy a vertical b2b software company, you know, I want to buy we had a searcher who was extremely focused, he wanted to buy a franchise or of homecare services company, and that this is the first search bundle that I went on a board of, and he, there were maybe 1520 targets out there, and he called all of them, and he got really smart about them. And he got a deal done, he found one of them to buy, and it was very successful deal with did about 10 years ago, a company called Griswold special care, and, and so you know, so there’s, there are a whole bunch of searchers that do do very focus searches. And that can be really powerful, because it obviously helps you narrow your range of what you’re looking for. It also makes you typically, you know, the 10th time having a conversation with a CEO of similar industry, you know, you’re going to be much smarter about that industry, you’re going to be much more persuasive and convincing the co owner right of their business that you might be able to actually buy it and run it and take it over. Because typically for the sellers, this not just that they care about the best price, they also want to leave their, you know, this life’s work that they’ve had, usually they’re older and so on, they’ve worked at this business for many, many years, they want to leave it in the hands of someone that’s going to really enable the company to flourish. And so it’s so that can be really helpful model. I’d say that. Yeah. Having said that, often searchers will find deals. In sectors they don’t even think that they’re going to go look at in the beginning. And it’s a very competitive market out there right now, you know, there’s a lot of capital chasing opportunities. And so, searchers I think, has to be pretty opportunistic. And so often it’s, they will have targeted kind of the look from one industry to the next kind of so they’ll go kind of say, Okay, I want to find, you know, water filtration services businesses in the northeast and unlivable trying to find call everyone they can get insurance to go, you know, find, you dig up a bunch of opportunities, and they’ll go pursue that, and then they’ll run its course, F over a month or two, and then, you know, go on to the next one. And so that’s awesome. You know, the process ends up ultimately leading to an opportunity. But you know, there are a bunch of examples where you, let’s say, you know, you want to find a b2b vertical software company, and you’ve talked to a business broker in Florida. You know, in Jacksonville, they happen to have a deal that you were looking at for a reason, you know, you don’t, the searcher doesn’t do that deal. But that guy happens to have this other business that he knows about, right. And that business has nothing to do with b2b software. But he lets the searcher nomadic because they had a good relationship, or they had a good couple conversations, and that turns into B, that ends up being the deal that you end up buying. So some of it can be a little bit random, I guess.


Will Bachman 24:36

Now, tell me a little bit more about what your firm does.


Tushar Shah 24:41

Yeah, so we, I guess I didn’t mention that in the beginning. So we we’ve been around since 2003. We invest mostly in small public companies, but back in 2005. So now it’s been almost two dozen for us. It’s been almost 20 years that we’ve been investing in search funds. We started doing search funds In the last six, seven years, we’ve been doing a lot more in the search fund world. So we, we’ve backed this plant over 100 of these search funds. Right now, as we speak, we have over 40 active search funds that are out there, you know, and I think they have search funds in eight different countries around the world right now. Looking for opportunities, we have a portfolio of about 35 active search fund companies that are out there, that we participate in the actual acquisition. And so and, you know, it’s part of the process of the investors working with the entrepreneur, typically, at the time of the transaction, a benefit of this model is that the search fund investors, some subset of them will typically become board members of the business and so the entrepreneur is not in there alone, you know, is getting the guidance and, and the help of, of this, you know, group of experienced investors, and many of them being former operators as well, to help along the way, and we do a bunch of that as well. So we’re between my partner and myself, we’re on, I think, eight, eight search fund boards as well. And so that’s how we’re involved in it’s, it’s a, it’s a really, for us, it’s, you know, it’s a very lucrative way to investor capital. And it’s also just a ton of fun, because we get to look at, you know, get to work with these super talented entrepreneurs and learn about all these really interesting businesses all over the world.


Will Bachman 26:41

No, so does your fund typically take the whole kind of enchilada for someone? So you would provide the whole, let’s say, 400,000? Or are you one of the 10 investors that the entrepreneur has to assemble? Like the other nine?


Tushar Shah 26:58

Yeah, no, I’d say. So the search fun world, I mean, there are some investors out there that are doing the whole enchilada, as you described, and it’s almost a different animal to this sort of the search fund universe, quote, unquote, is really this kind of distributed cap table, where you have a whole bunch of investors. And so we are one of, you know, we’ll typically do about 10% of the search fund, you know, so in that case, 40,000, out of the 400,000. And the time of the deal, where we are one of the bigger sort of are, the investments that we make per deal tend to be on the higher end of sort of the universe that we’re in. And so we will often be sort of 10 to 25% of the deal when we actually get to the investment stage. So we’re not we’re not, you know, we don’t take the whole thing.


Will Bachman 27:46

Yeah. So how do these graduates of business school? How will they typically go about assembling assembling this pool of 10? or So investors? Is there some organized process for this? Are they just working their network? Or is there, you know, like a set of, you know, 50 of these people that you, you know, their interview? Like, how does it work for someone to assemble that set of 10? Investors?


Tushar Shah 28:12

Yeah, it’s, it’s, the universe is relatively narrow. So I mean, it’s getting bigger every day, I guess. But there’s sort of in the US, there’s probably 50, you know, core investors that are sort of have done have had a lot of experience investing in many search funds. And then there’s going to be lots of folks that have done maybe one or two search funds, and they’re sort of just getting their feet wet. And deciding whether it’s something they want to do more of. And so it’s a it’s a pretty tight, you know, network and it’s by by the, its nature of how the search fun world works, because all of us all the investors are typically on other, we’re all sharing boards, right? So, you know, on this deal, I might be on the board, but on some other deal. I won’t be on the board, but there’ll be some other co investor, right, that’s on the board. And so it’s a, it, it sort of necessitates cooperation between all these market participants. And so often, you know, if a search fund, a search funder, a potential prospective search funder calls me up, you know, and we have a good conversation, then obviously, I will, you know, then I’ll put them in touch with a whole bunch of other sort of investors that we typically invest with and vice versa. And so it’s kind of a networking approach. But certainly, if you get into this world, I mean, there’s, you know, there’s a pretty, pretty clear set of initial investors that you might want to go reach out to that have done a lot of search fund investing. So, and the established you know, the business schools, where a lot of graduates, you know, have have done this, the professors and you know, that even within the alumni communities, etc. They’re very Type networks there they can they can help. Interesting


Will Bachman 30:03

is there? It sounds like so it sounds like it’s a more informal process. It’s not as if there’s a kind of search fund day at Harvard Business School recruiting where no funds would show up and people can, you know, audition or that kind of thing. It’s a, it’s more working the network.


Tushar Shah 30:21

Yeah, I mean, they are. The Stanford every year has a conference search on conference, which is really more focused on existing investors and existing companies and so on. But different business schools do, I’d say, I’m pretty sure Chicago has in the past and Harvard as well, where where they do organize these events where there is some of that happening, you know, it’s not sort of as formal, as you just described, but it’s, you know, you’ll have a bunch of investors come and people speak about the surfer model, and so on. And then you’ll have existing students that are thinking about it, or know that they want to do it, and it’ll be good time for them to network and get to know investors have some of the pandemic, you know, that kind of event has slowed down, but it’s starting to come back again. And I’m hopeful I get to go to a couple of those in the next 12 months,


Will Bachman 31:12

or the contracts sort of standardized now for this space.


Tushar Shah 31:18

Yeah, they are. I mean, it’s, it’s, it’s a pretty straightforward you did, there’s a standard legal agreement, there little tweaks here, or there are some times between fund to fund but pretty much around the world. I mean, there’s some unique, you know, if you’re in France, there’s unique laws there around how equity can get set up in certain ways in Germany, and in Brazil, as well. And there’s some unique tweaks here and there, but pretty much the structure is the same, it’s you know, the these initial investors put up a certain amount of money, they get a step up, if a deal happens if they if a deal doesn’t happen, they lose their money. And, and then the do investors, and then typically, The Searchers have a set model to get their carry, you know, again, that sort of 20 to 30% of the upside.


Will Bachman 32:07

So let’s say listener to the show, who’s an independent professional. Maybe it’s like, oh, that sounds interesting. Maybe I’d like to do that. Is there a way for people who have been out of business school for several years to get into this space? How would someone who’s graduated two 510 years ago, who wants to do a search fund? Is there a path for that person?


Tushar Shah 32:32

Yeah, I’d say that. Absolutely. And I think the first step is to read a bunch of the material that’s available online, and there’s a ton of it. So Stanford does a primer every few years. And if you just literally just type into Google, Stanford Business, School search, fund primary, you’ll, you’ll find it I think they have a little bit of a, you have to put in your information or something, and then they’ll they’ll send you this PDF. And, you know, I think if you read that document, and you decide, wow, this could actually be pretty interesting to me, I think this could be an interesting path for me to pursue, then I would just reach out to again, you can just google search fund investors. And there’s a there’s actually a networking site called Search funder.com. It’s sort of like Facebook for search funds. So the number of online resources and and if you just start reaching out over LinkedIn, you’ll, you know, I’m sure you’ll be able to get in touch with a whole bunch of search and investors welcome to reach out to me as well. And then you can start getting a sense for, you know, is this something where I might be able to get traction with search fund investors? And also, from my side, you know, do I do I think this could be a good path for me, and obviously, talking to other search fund, former search funders that, you know, bought companies, ones that did search the process, but didn’t find a deal, etc. Again, there’s a lot of resources online, and you can identify now that the universe is pretty big. And there’s a lot of folks out there that have done this, or are doing it right now. You know, it’s a relatively, I think, easy community to learn about and to interact with.


Will Bachman 34:20

So to sharp, having done a lot of these deals, what are you typically looking for in your selection criteria to decide what entrepreneurs you want to bet on?


Tushar Shah 34:31

Yeah, so we we like to see evidence of success and achievement. So you know, that can be academic it can be through what they’ve done at work. The kinds of jobs they’ve had, and they assess the success they’ve had of those jobs. We want to see that they’ve had lots of conversations with search funders. Really importantly, You know, with folks who have gone through the process, and succeeded and succeeded being a search funder. And and, you know, the most important thing to us is that they’ve really understand what it is to go, that difficult process to go find a deal, you know, it’s a two year process, it’s, it’s, it can be really lonely. If you’re a single searcher, we don’t talk about it much. But sometimes they’re also dual searchers that do it in pairs, which can be a little bit easier. But still, this is a, it’s a, it’s a, you know, you whenever you get a deal done, it means that you’ve probably literally spoken to 500 1000 businesses, by the time you find the one that you’re going to do. And so you have to take a lot of rejection. And you have to be extremely persistent and have to be able to persevere, right. So you have to feel confident the person knows what they’re getting into. And also that they really have a strong desire to run a company. Ultimately, that’s what’s behind all this, and you’re not going to get through those two years of searching and find a company unless you really are committed to that end goal, right of running a company and, and that that fits for you, and for what you want as the next step of your career. And, and so, yeah, I mean, that that’s kind of what we look for.


Will Bachman 36:26

To what degree, would you say that the ability to successfully find a business and close a deal? How is that related to the ability once you’ve closed the deal to actually lead and grow the business? Are they strongly correlated? Or are they in some ways, almost orthogonal? Like, someone could be great at, you know, closing the deal, but it doesn’t tell you much about if they’re going to be good at running the business or not?


Tushar Shah 36:58

Yeah, no, it’s a great, it’s a great question. That’s it’s really unique about this. This sort of method of finding opportunities, entrepreneurship, and your death, right, the skills it takes to go get a deal done, and raise the money, you know, find the company negotiate a deal, get the trust of the seller, and then raise capital from your investors to get the deal done. That’s a different skill set, often from actually running and managing a business. And there are many examples of folks that have are only good at one and not the other. For sure. You know, one of the things on the first step about actually being able to get a deal done, that’s part of why the model kind of works is you have to go convince, you know, 1015 investors to invest in your search fund to begin with, right, and just that process, you have to talk to literally, you know, 1050 100, folks, before we get to get, you’re going to get to the point of actually even having a search fund to begin with. And often if you’re able to do that, and convince voters to give you money in the search phase, you know, that that gives you gives, there’s some likelihood that you’re going to be the kind of person that’s always going to be able to get a deal done. So that can help. But you’re exactly right, that when you’re actually when it comes down to running a company, honestly, we’re taking as investors, we’re kind of taking a bet, an unknown kind of bet to some extent, whether that’s going to work. And often this as I mentioned earlier, I mean, the search funders, often, you know, they may have worked at a consulting firm or an investment bank, and they may not really have had much operating experience, a lot of the a lot of them will have done an internship, some of them if they knew they want to do a search fund after business school, for example, will do their internship at another search fund, so they get at least a taste for it, and they get some operational experience under the belt. But that’s, you know, it’s only a summer. And, and so, you know, obviously, sometimes it doesn’t work out. And often even if it’s a great company, it does well, you know, it’ll make sense to, to evolve leadership of the business as opposed to acquisition. But amazingly, that’s what I mentioned earlier about how our selection criteria, you know, if the person has a real drive, to run a company manage a company. And they have a competence to do it, and just the raw, you know, talent to do it. And that’s, you know, what we’re selecting for, to some extent, it’s amazing. We were kind of really skeptical, honestly, when we first started investing a search fund 20 years ago about this, but it’s amazing to us how, you know, really talented, hungry, ambitious people, I mean, what they can do, and, you know, tied together with a good business, you know, that’s, you got both Right, yeah. Really talented folks, but also just, you know, fundamentally really attractive businesses that have really good tailwinds going for them and a combination of those things. You know, just amazing things happen.


Will Bachman 40:04

Other than selling a business to a search funder who happens to find them? And it sounds like right now, there’s only 50 or so per year, for someone who is, you know, started a business and grown it and their kids don’t want to inherit or run it. Like, what are the other ways that, you know, business owners used to sell their business? Maybe you could talk a bit about, you know, business brokers, or if there’s other things, if it’s too small, for a P firm, what are business owners doing to, you know, to sell the business?


Tushar Shah 40:44

Yeah, so, I mean, from a business owner perspective, for sure, there’s a busy route of using a broker, a business broker, and certainly if you go with a business broker, the search funders are, you know, one of the first steps is getting deeply connected in with a broker community that are sort of focused on best selling businesses have these kind of the sort of search fund scale. And so often you’re going to be interacting, you may find yourself talking to some search vendors eventually. You know, I think, right now, broadly speaking, it’s it’s, it’s still a seller’s market, if you got a quality business. You know, there are a lot of folks out there that will be interested in your business. And so, you know, from a search funder perspective, we ideally are trying to find businesses without a broker involved, because often we have a higher chance of closing that deal. And also a chance of potentially getting a more attractive valuation if there’s not lots of competition. Obviously, if you’re on the other side of the table, and if you’re a seller of a business, you may want to have a broker involved, or you may want to have a process in place to have multiple bidders, or multiple people being interested in your business. And so from your point of view, it’s sort of a in most industries, with a handful of phone calls, you should be able to get in touch with either brokers or other other you know, strategic acquirers or folks that could be interested in your business or help you to sell your business. And I mean, as I said earlier, it’s definitely a seller’s market today. Still, there’s a lot of capital out there and a lot of folks that are interested in buying quality businesses. So it’s a good time to sell if you’re, if that’s the right thing for you to be doing with your business.


Will Bachman 42:41

To what degree do they’re obviously competing with one another, but to what degree are any search fund funders cooperating? It sounds like there’s a lot of work that’s somewhat duplicative of, you know, getting lists of businesses and making phone calls and so forth. And hearing a lot of nose, is there. Any models other than just two people pairing up? Or there? Have there been cases where people create some central repository of, you know, businesses that don’t want to sell? Or that you know, we’ve called and try is there, or, Hey, it’s not right for me, but maybe someone else would be interested in this business?


Tushar Shah 43:21

Yeah, no, it’s a great question. And there actually have been a handful of there’s a, there are a handful of search fund accelerators, that people that have sort of tweaked the model in different ways. And one of the key ways is to leverage the work from one searcher to x, because as you say, it’s certainly true that, you know, a searchers talking to these hundreds 1000s of companies, and you know, what, they’re only going to do one deal. And so there’s a lot of work there that theoretically could be leveraged by the next searcher. And it is true that there are certainly times when a searcher will we have a case right now where there’s a searcher that has two deals that are very close to getting done. And they picked one. And they’re handing off the other one to another investor, another sorry, another search fund group. And they’re going to keep a little bit of economics, they figured out some kind of way to make it fair. But and that can happen from time to time. But I’d say that what’s happening is a lot of the information and value of the communication and the work being done by the search fund by the search funder to go find a deal get failed pretty quickly. You know, it’s sort of like either the time is right, or the time is not right. And a lot of stars have to align. And so there’s only there’s maybe less value to that coordinated effort and repository of information then, may may seem like there would be at least that’s been our experience. It’s sort of there is a little bit of recreating reinventing the wheel. That does happen but The plays there’s a lot of shared resource around like this already very clear. The search funders have all kind of figured out now. And they did a very great about sort of sharing information around what CRM to use, you know what business lists to buy, where to get the information, etc. And then But then beyond that, it’s really like, you know, you got to start, you know, making phone calls, sending emails and seeing where you get


Will Bachman 45:30

if folks wanted to learn more about your firm, where would you point them online? You look


Tushar Shah 45:36

at if you go to Kinder partners comm you’ll, you’ll see a bit about us a little bit of background and sort of what we do and, and so on. And feel free to reach out to me, I’m on LinkedIn as well. And feel free to reach out and happy to, to chat with either folks, you know, either on the business side or folks that are maybe interested in being searched vendors themselves or exploring that as an opportunity. Always happy to chat.


Will Bachman 46:02

Fantastic. We’ll do Sure. Thank you so much for joining today’s was a great conversation.


Tushar Shah 46:07

Oh, no problem at all. Thanks a lot. Well

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