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Over the past few years, Gerald Edelman has built a solid reputation in the UK SF space. What kinds of services do you provide to acquisitions entrepreneurs?
Our work with searchers mostly involves advising them throughout the acquisition process; including advising on terms, assisting with negotiations, undertaking financial and taxation due diligence and advising through to (and often after) completion. We also regularly assist with structuring advisory at the time of formation of the search fund and/or around the acquisition.
Don’t you think that offering target identification and initial contact could be seen as taking over a searcher’s role? Additionally, we are seeing more deals brokered by M&A brokers or small investment banks. Doesn’t this move away from the original philosophy of SF, where one had to sift through thousands of potential targets to find the ideal one, ideally resulting in proprietary deal flow?
Whilst we offer target identification services on the buy side, it is a service that is not often taken up by our search clients. That said, we have seen self-funded acquisition entrepreneurs engaging the services of buy-side agents, sometimes even whilst remaining in employment themselves. Of course this is a departure from the original philosophy of search funds, but so is self-funded search and so is the increasing use of sell-side brokers and M&A advisors for deal flow. However, the reality is that the ETA space is growing, competition is increasingly fierce, and off-market proprietary deals are few and far-between. I believe that the entrance of more self-funded acquisition entrepreneurs has meant that a greater proportion of the searchers in the market are less willing or able to spend 2-3 years searching for the right proprietary deal, which has driven this trend. The traditional model is still there and still preferred by many searchers and investors, but naturally there will continue to be an evolution in the space and we need to embrace that.
We are beginning to notice legal actions against sellers in some transactions after taking over the company, and some investors attribute this to due diligence being too “scant” in the SF segment. What are your thoughts on this?
Unfortunately, I have seen issues like this arise through a lack of proper due diligence. Indeed, I have been engaged as an expert witness in one such matter and the lack of diligence undertaken was astounding. However, I do not agree that due diligence is generally too ‘scant’ in the SF segment. If a searcher is using a cash flow facility to partially fund the deal, the lender will generally insist on having a proper due diligence report prepared by a reputable provider, on which they can place reliance. However, certain lenders and some asset-backed facilities do not call for such reliance or even to see DD, which sometimes searchers take as a green light to save costs in this area. To my mind, it is absolute madness to undertake such a transaction (regardless of size) without an appropriate and proportionate level of due diligence being undertaken. As well as diligence gaps and weaknesses, another (more common) cause of post-transaction disputes in search transactions is disputes around enterprise value to equity value bridge adjustments, particularly in the case of a post-transaction completion accounts adjustment. This is often down to the sellers being unsophisticated and/or poorly advised, leading to them misunderstanding the terms of the transaction to which they have agreed.
In the UK market, we observe many more self-funded structures than in other European countries. How do you explain this? How competitive is the PE market for small transactions?
Raising a traditional search fund in the UK has become a little more difficult, owing to a lack of investors willing to invest in UK-focused search capital. I am sure this is a not the only factor, but it’s definitely one of the drivers behind this trend. The lower-mid-market is competitive, but searchers are still managing to find good businesses to acquire and more come to the market each day.
Last year, you successfully launched the ETA Awards, and on November 7, 2024, you will repeat this experience. What are the different award categories, and what can we expect from this new edition?
The launch of the awards last year came about after I attended one of the many ‘Dealmakers’ awards in February and on reflection the next day thought I’d rather have been at something focused on the search segment. I tried to find an event to attend, but nothing existed. I had two options, (1) wait for someone else to do it, or (2) set it up myself.
Thanks to our fantastic marketing team here, it was a great success, and we are really looking forward to this year’s event, which is set to be even bigger and better than last year!
This year we are running the following awards categories:
- Lender of the year
- Community contribution
- Deal of the year (self-funded)
- Deal of the year (traditional)
- ESG excellence
We are noticing an increase in activity in the SF landscape all over the world. What is your vision for the UK market?
I believe the search fund space will continue to grow in the UK, and it will also continue to evolve. I’d like to see more traditional search funds as a proportion of all searchers. Education is important to ensure that sellers and their advisors understand the model and appreciate that searchers are not only a viable option, but often an excellent option for exit and succession. I’d love to see some Government support to assist the facilitation of retirement and succession through funding guarantees (like the SBA scheme in the US), which will avoid the unnecessary closure of decent businesses and allow ambitious entrepreneurs to step in and fulfil their potential.
