Searching for a Search Fund Structure: A Student Takes a Tour of Various Options

Abstract

The case focuses on James Guba and his interest in Search Funds as a means to quickly become the CEO of a company and mitigating some of the risk associated with entrepreneurship. The case profiles a number of successful entrepreneurs, who used search funds in order to illustrate for students the different options for those seeking to benefit from search funds.

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

Resources

Exhibit 1: Key Elements in Various Search Fund Structures

Funded Search

An entrepreneur, or team of entrepreneurs, raise approximately $300,000 to $400,000 in search capital to attempt to find a business to acquire within a two to three‐year period. If the entrepreneur finds a business to acquire, investors have the right, but not the obligation, to invest equity in the acquisition of the target business. The search capital is typically stepped up into the acquisition by 50% (if the entrepreneur raised $300,000 in search capital, that amount is rolled into the acquisition at 1.5x or $450,000). The entrepreneur will run the acquired business as the CEO for 5 to 10 years and the investors will serve as board members. At some point, the business is likely sold to a strategic or financial buyer. The entrepreneur has the opportunity to receive up to 25 to 30% of the equity based on closing the acquisition, vesting and IRR performance. The entrepreneur typically earns a salary during the search and while as CEO.

Self‐funded Search

An entrepreneur, or team of entrepreneurs, seek to purchase a business to run and operate. While searching for the target business the entrepreneur uses her own capital for the search phase. If a target is identified, the entrepreneur might use her own capital to facilitate the acquisition or might raise outside capital in the form of common equity, preferred equity, or junior debt. The entrepreneur might own 30% to 100% of the equity. The entrepreneur would determine if and when an exit is sought. Typically, self‐funded projects tend to be smaller in scale than funded projects due to limited and less readily available capital. The entrepreneur typically does not earn a salary during the search and earns a salary as CEO when the business can support the compensation.

Incubator Search

An incubated search typically involves a sponsor organization who assembles a cohort of highly talented searchers who have great potential as CEOs of small‐ to medium‐sized businesses. The incubator trains them to efficiently search for suitable companies and effectively deal with sellers, bringing them up the learning curve in just 6 weeks rather than the 9‐12 months it typically takes searchers on their own. The incubator helps them avoid wasting time on opportunities that won’t work out by getting to “no” fast. While the searcher retains control of the deal, handling all discussions and negotiations, the incubator’s team of diligence experts, lenders, lawyers, and experienced mentors gives them unlimited support. The incubator then provides the equity financing required to complement the debt financing put in place by the searcher. Drawing on the strong relationship developed during the search phase, the incubator helps the searcher‐turned‐CEO select the right board of directors and navigate challenges in strategy, operations, sales, human resources, and other areas of the business. 1 The entrepreneur typically winds up with a 25% carry (1/3 at close, 1/3 over 4 years, 1/3 IRR performance) 2% is put into a “common” fund that will give him a piece of the other incubator member deals. The entrepreneur typically earns a salary during the search and while as CEO.

Exhibit 2: Jose P. Moreno Resume

JOSE P. MORENO

EDUCATION

YALE SCHOOL OF MANAGEMENT

Master of Business Administration (MBA)

• Co-Chair PEVC Club for academic year 2016/17

• Honors: Consortium Fellow, and merit scholarship (Conley Brooks ’44 B.A Family Scholarship)

New Haven, CT

2017

UNIVERSIDAD DE LOS ANDES

Master of Science in Economics

Bachelor of Science in Economics

Bachelor of Science in Business

• Honors: Merit scholarship

Bogotá, Colombia

2011

2010

2010

TULANE UNIVERSITY

Bachelor of Science in Management (BSM)

Dual degree program: Tulane University and Universidad de Los Andes

• Concentrations: Finance, Management

• Honors: Magna Cum Laude, Dean's List, Merit Scholarship

New Orleans, LA

2008

PROFESSIONAL EXPERIENCE

NEBRODI PARTNERS

Private Equity Summer Associate

• Participated in multiple leverage buyouts (LBO) across industries

Hartford, CT

June 2016–June 2017

IECM (Private Equity)

• Retained as exclusive buy-side advisor in the purchase of a USS 200 mm water treatment plant in Colombia

New York, NY

2015

INTERLINK S.A – Leading investment bank in Colombia

Investment Banking Associate

• Participated in the negotiation of a USS290MM private placement through Pacific Rubiales Energy and IFC’s Asset Management Company. Transaction was labeled as IFC's largest equity investment in a greenfield project

• Developed the business plan and the financial model for the construction and operation of a US$660MM multipurpose port in Cartagena, Colombia, and participated in the negotiation of a US$370MM non-recourse loan to finance the project. Transaction was labeled Project Finance of the Year by the World Finance Magazine

Ø Board of directors observer (March 2014 – March 2015)

• Led a team of analysts in the execution and development of multiple financial models and management presentations that resulted in financial closings for infrastructure projects in excess of US$1.0 billion

Bogotá, Colombia

2012‒2015

INVERLINK S.A

Investment Banking Analyst

• Built financial models, budgets, forecasts, and valuations for companies operating across multiple industries including retail, transportation, infrastructure and financial services

• Conducted due diligence processes, including compilation of data, administration of virtual data rooms, and reconciliation of internal accounts

Bogotá, Colombia

2010–2012

ADDITIONAL INFORMATION

• USA Citizen

• Languages: Spanish (Native) and English (Fluent)

• Board of Directors: Puerto Bahia Pacific Infrastructure (2014‒2015) and Distribuidora, Sultana del valle (2010‒2014)

• Founding Partner: TAXIMAR S.A. (a transportation company), and AUTOCEANO S A.S (a financing company)

Exhibit 3: Judd Lorson Resume

JUDD A. LORSON

EDUCATION

YALE SCHOOL OF MANAGEMENT

Candidate for Master of Business Administration (MBA), GMAT: 730 (96th percentile)

• TA for inaugural Search Fund course and President of the Real Estate club

• Founded two early stage technology companies focused on real estate and clean water

New Haven, CT

2017

OLD DOMINION VNTVERSITY

Master of Engineering Management (MEM). GPA: 4.00/4.00

• Completed projects on creating passive income with investment real estate and successful task execution

• Coursework in Operations Research. Project Management, Managerial Finance and Risk Analysis

Norfolk, VA

2014

DREXEL UNIVERSITY

Bachelor of Science (BS) in Mechanical Engineering. GPA: 3.80/4.00, magna cum laude

• Vice President of Pi Tau Sigma chapter, International Mechanical Engineering Honor Society

Philadelphia, PA

2008

PROFESSIONAL EXPERIENCE

AVALONBAY COMMUNLT1ES, INC.

Summer Development Associate

• Completed initial underwriting for 5 real estate development pursuits representing $1B in investment value

• Collaborated with multi-disciplinary asset management team to prepare materials for $100M multi-family development deal presented to corporate investment committee consisting of CEO. CFO and COO

Melville. NY

Summer 2016

UNITED STATES NAVY

Fleet Integration Program Manager, Submarine Learning Center

• Led a team of 15 subject matter experts over a one year period in identification and adjudication of 18 training device deficiencies resulting in $2M worth of improvements at 7 globally located training centers

• Advised the Commanding Officer on strategic training priorities: developed presentations to communicate these priorities to senior civilian leadership at the Pentagon and executive-level military commanders

• Created and implemented a new process to maintain curriculum for 288 submarine force training courses in response To reference publication updates improving learning outcomes for 120K Students

Groton, CT

2013‒2015

Division Officer, USS Memphis and USS Toledo

• Managed a high turnover division of 20 mechanical technicians: planned execution of 5,000 man-hours of first time quality maintenance over a 2 year period; supervised integration of $500K in temporary systems

• Awarded two Navy and Marine Corps Achievement Medals for exemplary leadership of 30± personnel in a dynamic shipyard environment and for managing the implementation of 20 certification tests of 3 vital shipboard systems

• Directed 10 team members over a six month period in operation and mission execution of a $2 billion attack submarine with a 100% safety record in a position typically reserved for more experienced leaders

2010‒2013

Qualified Nuclear Engineer by the Department of Energy, Naval Nuclear Power Program

• Certified to lead 40+ personnel in operating one of 70 submarine nuclear power plants in the United States

2008‒2012

ADDITIONAL INFORMATION

• Avid traveler with personal and professional visits to 15 countries on 4 continents and 27 of 50 US states

• Volunteer class leader of three separate 9-week community based personal finance programs for 60+ participants

• Licensed Realtor® and active RE investor With 3 properties in PA and CT with a combined unlevered yield of 15%

• Devoted distance runner and Boston Marathon participant with 18 race finishes at distances of half marathon to 50 miles

Exhibit 4: Tina S. Bowman (Disguised) Resume

TINA S. BOWMAN

Education

2013‒2015

HARVARD BUSINESS SCHOOL, BOSTON, MA

Master in Business Administration, May 2015. GMAT 726. Member: Women’s Student Association, European Club, and Entrepreneurship Club

2007‒2011

BOSTON UNIVERSITY, BOSTON, MA

Bachelor of Arts degree, Summa cum laude in Psychology while working full time for New England Steel Company. Secretary of Student Government. Highest-ranking member of the senior class in the Psychology Department and Academic Honor Award, awarded to the top 5% with the highest GPA's in College of Arts and Sciences. Semester at Institut d’Études Politiques de Paris (Sciences Po) with coursework in Literature, Political Theory, and Psychology

Experience

2015‒Present

YANKEE CAPITAL SEARCH, BOSTON, MA Owner

Managing a small private equity firm that I created for the sole purpose of acquiring and operating one small business on the east coast. An ideal business would generate $.5‒1.5M of EBITDA annually, have strong recurring revenue, and operations that are not technologically sophisticated

2012‒2013

NEW ENGLAND STEEL COMPANY, BROCKTON, MA

European Operations Manager

Managed capital purchases ($58M annually), cash, and daily business transactions and supervised 8 sales managers

• Discovered new supplier for our leading product, enabling company to cut prices and double market share

• Secured $1.7M contracts from two new mills in Europe, which drove Asian competitor out of European ultra-high tensile steel market

• Convinced shipping company to lower transport costs, resulting in $4M in savings

2011‒2012

Sales Manager

Estimated sizes, quantities, and specifications for all specialized contracts

• Negotiated pricing and sizing options with suppliers in Asia, Europe, and North America

• Updated operations, allowing company to acquire five new contracts, each of which now generate over $4M in revenue annually

2007‒2010

Executive Assistant

Provided executive-level administrative support to the president of the company

• Tracked steel shipments, processed orders, ran mill test reports, and prioritized tasks for owner

• Created a comprehensive Business Continuity Plan that was accepted and implemented by the CEO

Personal

Travel, spirituality, and all things triathalon related

Exhibit 5: Kenny Stone Resume

KENNY STONE

Education

2015‒2017

HARVARD BUSINESS SCHOOL, BOSTON. MA

Candidate for Master in Business Administration, May 2017. Club Leadership; Chairman of African American Student Union Conference.

2005‒2009

FLORIDA A&M UNIVERSITY, TALLAHASSEE, FL

Bachelor of Science degree, magna cum laude, in Business Administration with finance concentration. Activities: Goldman Sachs Diversity Leadership Summit. Florida A&M Presidential Ambassador. Chief Financiers Organization

Experience

2016

TRINIDAD CHOCOLATE FACTORY, PORT OF SPAIN, TRINIDAD

Strategic Advisor and Operator

Developed and executed marketing, product development and go-to-market strategies for signature brand. House of Arendel to launch in the domestic marketplace (HBS Rock Summer Fellowship Recipient)

• Completed thorough business model analysis by developing consumer and customer value propositions and redefining target market from European to regional Caribbean markets

• Developed and fielded exhaustive market research reformulated signature chocolate recipe, created new flavors to match local taste preferences, redesigned product packaging and utilized alternative purchasing channels

• Consulted and collaborated extensively with regional distributors, investors, scientists, farmers and chocolatiers throughout Trinidadian cocoa ecosystem

2014‒2015

STONE FINANCIAL, CINCINNATI, OH

Chief Operating Officer

Designed and implemented business strategies to improve infrastructure for increased growth and profitability

• Overhauled existing accounting and cash flow management systems, generating a 300% increase in available cash for marketing and capital expenditures

• Analyzed marketing strategy and identified opportunities to leverage strategic partners to increase prospective client events, resulting in increased assets under management by 4%

• Instituted technology and network updates, vastly improving client relationship management software, remote access platform and overall communication efficiency

2011‒2014

2012‒2014

BARCLAYS BANK PLC, NEW YORK, NY

Associate, Global Leveraged Finance

Worked extensively with client management teams and senior coverage bankers to execute high yield and leveraged Loan transactions in the consumer retail sectors, earning die highest ranking in my 6 person peer group

• Managed a team of investment bankers in my vertical Leader's absence for several months, effectively maintaining key workflow across client service and transaction execution

• Evaluated current market conditions and comparable financing transactions to participate in negotiations regarding credit terms and covenant packages for both syndicated bank loans and high yield bonds

Selected Transaction Experience;

• H. J. Heinz Company – $28.3 billion leveraged buyout by Berkshire Hathaway and 3G Capital

• Post Holdings – $2.0 billion tax-free spin-off from Ralcorp Holding

2011‒2012

Analyst, Global Leveraged Finance

Built financial models assessing valuation, cash flow production, growth opportunities, risk factors and debt capacity to determine market receptivity of the transaction and manage client expectations

• Created presentations to support extensive credit analysis, due diligence, and business discussions with management and investors to facilitate successful transaction syndication

2009‒2011

CIT1GROUP, NEW YORK, NY

Analyst, Global Leveraged Finance

Managed financial analyses to drive idea generation for clients and prepared presentation materials, credit approval memoranda and weekly market updates

Community

Mentor to junior investment bankers, motivational speaker to elementary students, financial supporter of New York City charter schools (Eagle Academy. South Bronx Classical) and the Susan G. Komen Foundation

Personal

Enjoy meditation self-improvement, vegetarian cuisine and travelling

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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