Your network is worthless. Roll up those sleeves.
I want to address the importance of your personal network. Okay, it’s not completely worthless (I have to write slightly incendiary titles for SEO.), but it’s likely not worth as much as you think.
That’s both good and bad. Let’s start with the good.
When prospective searchers are first presented with the idea of buying a business, they often feel unqualified to do so. They think, “I don’t have enough money to do that,” or “I don’t know any business owners.” These doubts filter many would-be searchers out of the process.
This’s a shame, because you really don’t need money or connections to be a successful search fund entrepreneur. We’ll talk about the money question in a different post, but here let’s talk about the network.
You might know people in private equity, investment banking, accounting, law, or similar industries that have great networks of business owners and intermediaries. You may think that they have a much better chance of finding a good business to buy. Or maybe you are one of those people, and you’re confident that if you just send a message out to people you know, you’ll have a deal in no time.
Unfortunately for the well-connected, but fortunate for the rest of us, search fund entrepreneurs almost never buy companies through their personal networks. They all try, as well they should, and several have succeeded. However, the large majority need to search outside their inner circles, a fact which levels the playing field a bit.
So why is this? Why can’t someone who, for example, has been doing PE deals for the last five years buy a business very quickly?
As a searcher, what you’re looking for is not quite a needle in a haystack, but it’s close. Think of all the filters through which a company must pass before you decide to buy it:
Right industry - In most cases you’re likely looking for an asset-light service business with recurring revenues in an industry that doesn’t carry too much risk (e.g. concentration, technology, regulation, etc.). That eliminates quite a few industries!
Right geography - If you’re like most searchers, you have a few geographic restrictions, even if you’re running a “nationwide search.” Opportunities outside your geographic requirements are disqualified.
Right company characteristics - You’re looking for the right size, team, growth, margins, product or service, competitive advantage, growth opportunities… No company is going to be perfect, but you’ll have to eliminate quite a few companies to find the right one.
Right seller - You’re looking for a particular seller profile. For example, the seller in a search fund deal will typically not be a PE fund. (As always, exceptions do exist.)
Real need - You’re not in the business of convincing business owners to sell. You need to find a willing seller with a real need.
Right timing - You’re looking to buy now. Any opportunity you’re introduced to who is considering a sale in the next 1-5 years is not going to be worth your time.
Willing to sell to you - Not every business owner is going to feel comfortable selling their business to someone who’s never been a CEO before, and in many cases, never worked in their industry. And hey, some sellers may just not like you. You need to find the seller for whom your story and approach ring true.
Right price - Even if the company makes it through all the above filters, you still need to buy at the right price.
Let’s say you have a powerful, intelligent, well-connected personal network of family, friends, and colleagues, and they send you, optimistically, thirty opportunities over the course of your search. What are the chances that any of those will meet all your criteria? Almost nil.
This means that, while any new searcher should alert his or her personal network and welcome any leads, almost all of the searcher’s time and effort should be spent searching outside that personal network. Because there are so many ways for an opportunity to be disqualified, every searcher is obligated to fill the top of the funnel with as many high-quality leads as possible - thousands of them. And to achieve the required volume of leads, the searcher must look far and wide.
Again, you should absolutely let your network know what you’re doing, and you should encourage any leads. However, manage your expectations. There is yet another filter here: your contact must actually understand what you’re doing and your search criteria. Not many will.
Your family and friends might tell people you’re “fundraising” or you’re “in finance.” And if they do understand that you’re looking to buy a business, they’ll send anything they come across at first - the gas station down the street, a web domain for sale, or Twitter. Then when you reject those opportunities, as delicately as possible, they’ll get discouraged and stop sending you leads.
Action Items
So what should you do? Create a simple e-newsletter template using an email marketing tool like MailChimp or Constant Contact, add all your personal contacts to a distribution list, and send a quarterly update that gives a very high-level answer to the question “How’s it going?” Pick out 2-3 industries you’ve looked at, and say why you found them interesting. Tell a story or two about interesting opportunities. And provide a quick narrative about how you’re feeling.
With limited time invested, this will help you in a few ways:
It will keep you top of mind among your network, in case they do come across opportunities to share.
It will shield you from at least some of the dreaded “how’s it going” questioning.
It will give people something exciting to read, and they’ll want to be involved. You might be able to capitalize on that momentum once you conclude your search, either to improve the business you buy or (heaven forbid!) look for a job… but hopefully the former.
