Subscribe to unlock this article
Thanks for your support.
Investing in a SF or supporting an entrepreneur through an acquisition process requires a deep understanding of the searcher’s background, capabilities, and track record. However, reciprocity in this selection process is crucial. The best searchers are equally discerning about the investors they choose to join them on this journey.
From our perspective, there is no such thing as an “ideal cap table.” Instead, we always advise searchers to include a diverse mix of investors. This mix can consist of private individuals, former searchers, family offices, and funds of SFs (local & international). Ideally, you should aim to balance seasoned investors with years of experience alongside newer players. Each type of investor brings unique value to the table, and because you can’t predict the exact nature of the deal you’ll find, this diversity is essential.
You should also anticipate that in about 95% of deals, there will be an equity gap to close. This could arise because your deal is too small for large international funds, too large for smaller private investors who may be uncomfortable writing checks exceeding $500,000, the industry is not a good fit for the investor’s interests, or because of potential conflicts of interest with their other investments.
We have spoken with many outstanding searchers who were fortunate enough to be oversubscribed. We asked them how they ultimately selected their investors. Based on their insights, we have developed a list of questions to help you evaluate potential investors:
1/ Experience in SFs
- Does the investor have prior experience supporting SFs or similar acquisitions?
- What is their track record of successful engagement with searchers?
- What is the background of their team? Are they former searchers, entrepreneurs, or financial experts?
- Is the investor hands-on, or do they take a more passive approach?
2/ Reputation, credibility and transparency
The SF community is small, so an investor’s reputation matters. Seek references from other searchers and investors to gauge their credibility.
- Is the investor transparent and ethical in their dealings?
- What is their reputation, and how do they support searcher?
3/ Industry and operational expertise
- Does the investor have relevant knowledge or experience in the industries you are targeting?
- Can they add strategic value beyond providing capital?
- Are they genuinely interested in the niches or sectors you’re focused on?
- Can they offer valuable insights into operations, post-acquisition integration, or scaling?
- Does their existing portfolio conflict with your potential target acquisition?
4/ Financial capacity and geographic reach
- Can the investor reliably contribute the required capital, or are they likely to “step up” during the acquisition phase?
- If they are a private investor, what is their largest check size?
- If they are a fund, have they completed their fundraising, or are they nearing the end of their capital deployment? Have they already committed more than 80% of their vehicle and might need to raise a new fund within the next 18 months?
- Do they have strong regional expertise? Is your operational geography a key focus for them, or just a “nice to have”?
5/ Mentorship and potential as a board member
- Is the investor open to mentoring you through the search phase and helping structure the acquisition?
- What value can they add during the operational phase? Can they act as a coach and/or future board member?
- Can they help prepare you for the exit phase?
6/ Flexibility in terms and alignment with your vision
- Are they rigidly tied to the traditional SF model, or are they open to adaptation?
- Are they willing to negotiate fair terms?
- Will they support follow-on investments if your growth strategy requires it?
- What timelines and control structures do they prefer? What is their exit horizon?
7/ Network
- Does the investor have a strong network of advisors or industry experts?
- Can they bring industry-specific board members?
- Could they help you identify future acquisition targets or introduce you to potential customers?
8/ Commitment to the searcher
- How much time do they dedicate to meetings and their availability for guidance?
- How quickly can they make decisions?
- How large is their team, and how many active SFs are in their portfolio?
- Are they highly selective, or do they follow a “spray and pray” approach?
- What is their ratio of SFs backed to acquisitions completed?
9/ Problem-solving approach and track record of success
- How does the investor handle challenges or crises?
- Are they supportive and solution-oriented during difficult times?
- How many successful exits have they facilitated?
10/ Diversity of thought and personal compatibility
- Does the investor bring unique perspectives or challenge conventional thinking?
- Do they provide constructive feedback and challenge you when needed?
- Can you build a strong personal relationship with them?
- Do you trust them, and are you comfortable with a long-term partnership?
By evaluating investors against these metrics, searchers can select those who not only provide capital but also align with their goals, values, and operational needs. Remember, this partnership is like a marriage—except this time, you’ll have 10–15 partners!
