Succession is an age-old concern for many small businesses. For some owners it can be a challenge to find the right successor to take on the mantle of leadership, particularly where one prefers to let go of the reins whilst continuing to contribute to the success of the business. Owners want to ensure that whatever the future of the business may be, it benefits the company, and importantly the employees. As key employers across the UK, the future of small businesses is integral to the UK economy.
On the other hand, there are many would-be entrepreneurs who are looking for the right opportunity to fulfil their ambitions of owning and running a business. Many of these possess the necessary skills to take on the leadership of a small business, and take it to the next stage of growth. They also recognise the benefit of buying an already successful SME when compared against the risk inherent in starting a business from scratch.
A little-known but growing trend has taken hold in the UK that delivers a way of connecting highly-driven, entrepreneurially minded individuals with smaller SMEs exploring their succession plans.
Entrepreneurship Through Acquisition enables entrepreneurially minded individuals to acquire an established business where the owner is thinking about moving on and may not want to consider selling to trade or private equity due to a desire to protect and reward the teams who helped them on the journey.
Originating from Stanford Business School in the US in the early 80’s, Entrepreneurship Through Acquisition is becoming an increasingly popular strategy for entrepreneurs and MBA students in UK business schools who have the ambition of owning and running a business.
Many mid-career professionals, often MBA students and aspiring entrepreneurs, have a desire to one day own and run a business. Historically the barriers to doing this are quite high with the need to have an idea, take it to market and grow it successfully, often with limited capital creating inherent risk. However, acquiring an already established SME as a single investment, and then operating it or leading it (as an individual or as one of a pair), presents an interesting and comparatively less risky option. .While this path can be a long one, it remains relatively less known and can ultimately still be highly rewarding, with less risk and a clear path to gaining a meaningful equity stake in the business.
The first barrier to pursuing this route is capital. Individuals or partnerships going down this path will first, alongside a personal contribution, need to raise equity from investors, commonly found in their MBA alumni networks and circles. Investors will typically invest smaller amounts (c5% of the total) providing a platform from which to work and often providing some kind of stipend or income for searchers whilst they seek opportunities. From there, they must find a business to buy. This is when they’ll often engage with a lender like Shawbrook to add a debt element to the funding package to secure the eventual acquisition.
The equity raised alongside the debt funding from a lender enables the ‘searcher’ to find and approach businesses that meet their criteria. The costs associated with the search will include market research, travel, networking, due diligence, and legal and advisory fees. The size of the funding required can vary depending on factors such as the industry, the size of the target company, and the geographic scope.
The searcher's goal is to build up a relationship with the target business owners once they have been identified, who may not have heard of, let alone, considered this exit strategy before, or in some instances had not considered exiting. There are lots of factors that need to converge for a transaction to happen, so the search period can often extend to many months or even years before a perfect match is found. More often than not even, once a potential target business has been found, it can still take time before an acquisition takes place as trust needs to be established and the deal specifics need to be agreed.
While the equity raised from investors (and via their own personal contribution) will support the searcher in their quest to find a business, the searcher will, more often than not, require additional support to make the acquisition, which is where a specialist lender will come in.
Specialist lenders, like Shawbrook, will have the expertise in-house to support the searcher by helping to identify the fundamentals needed to secure debt. This allows the searchers to build this into their search and deal structuring strategy and reduces the potential execution risk later on. Clear guidance from a lender on what is required and how to structure funding, balancing the interests of the searcher, the bank and the vendor, is invaluable in increasing the probability of completing a transaction. By working in partnership with a lender though the search phase, there is a better chance of ensuring a flexible funding package that enables the acquisition and any subsequent follow on funding to support growth plans.
It is this early engagement and understanding of the model that is the real value add from a specialist lender. Unlike more traditional strategies such as MBOs, being brought in much earlier to the search process, enables them to guide the searcher on key characteristics, giving the absolute best chance of making a successful acquisition.
- Oliver Wilson, Managing Director, Head of Commercial Loans
Pictured: The five stages of a Search Fund. 1. Raise initial capital. 2. Search phase. 3. Raise acquisition capital and close transaction 4. Increasing enterprise value 5. Exit
Shawbrook has a strong heritage supporting these transactions, and our team has built up expertise in this growing area of the market. From experience, there are several elements that are required from the searcher, the target business and the deal which will make it successful and attractive to lenders.
To lend to a searcher, we would look for four key qualities:
In addition to areas that we consider with any business we lend to, three key elements are particularly important in Search transactions:
Within the deal structure itself, we tend to look for three key features:
We will look to understand the longer-term business strategy in any search deal we provide funding for.
This involves regular dialogue with both the existing management team and the searcher to ensure there is no sense of discord or cultural clashes. Good relations within these deals are what make them so successful, so talking to and understanding both parties is crucial. Alongside this, constant honest and open communication is a must, and we expect to be working closely with elements like reporting, KPIs, and management information, especially when there are other parties such as investors involved.
Search Funds or Entrepreneurship Through Acquisition is still a nascent strategy within the UK, but could be suitable for many aspiring entrepreneurs and businesses. The route can be long, but specialist lenders are on hand to support.
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