General Questions About Search
ETA is a great fit for those who want to have ownership over their career, who want an accelerated path to being CEO of a small or medium size business, and who enjoy working in partnership with others. Figuring out if ETA is a good option for you starts with objectively assessing yourself and the environments where you are at your best. Most of our successful Search Partners thrive in environments where they have autonomy. At the same time, they value the partnership that comes from collaborating with investing partners. And they like business building – but much prefer the challenge of taking a business from 1 to 2+ to taking a start-up business from 0 to 1. Talking with as many current and former Searchers, Search CEOs, and investors as you can is important to collecting the breadth of perspectives that will help you answer this question honestly for yourself. There is no “right” answer… only the “right” answer for you.
Our successful Search Partners share several common traits including first and foremost an entrepreneurial mindset, which involves an ability to work in an unstructured environment with limited resources to accomplish goals. They are also leaders with high levels of emotional intelligence who can influence and motivate others. All have an executive orientation, meaning they lean into making decisions, oftentimes based on limited information. Finally, they have sufficient levels of capabilities – or the willingness to learn quickly – in each of the areas needed to acquire and run a business including analyzing industries and business models, conducting due diligence, undertaking financial analyses, developing and executing strategy, sales, and leading others. Search – and then being a CEO – is a decathlon. Success involves having sufficient levels of aptitude in each of these main areas to successfully navigate everything you need to as a Searcher and eventually as a CEO.
In general, Searchers spend at least six to twelve months planning for and raising capital for a search fund. During this time, the Searcher will network within the search community, identify initial industries of interest, write a Private Placement Memorandum (“PPM”), meet investors, and raise capital. In our experience, those who are best prepared often complete at least one internship in search prior to searching – for a current Searcher, search CEO, or search investor. Building relationships within the community – with current and past Searchers, search CEO’s, investors, and community partners – is the most important part of this process as these relationships will be critical to your success throughout your search journey.
The majority of our Search Partners come directly out of MBA programs. However, we also enthusiastically partner with Searchers who are further along in their careers. For these prospective Searchers, it is particularly important they network broadly within the community prior to raising their Search Funds.
The average capital raise for the search phase is around $500k for a solo searcher and around $850k for a partnership search. This budget covers the Searcher’s costs for 24-30 months. The capital raised is used to cover a moderate salary for the Searcher, as well as to fund the expenses associated with the search, such as travel, software and database subscriptions, legal and accounting fees, interns, offices expenses, and other expenses related to the due diligence process.
Searchers must be comfortable with the possibility of not finding a business to buy or acquiring a business that performs poorly. However, in our experience the experience gained during search is valuable regardless of the outcome of finding a business to acquire. Even those who do not end up acquiring end up finding great career opportunities after concluding their search, often either staying within the search community in an operating role at a search company or returning to professional services firms.
An additional risk is that the search process itself – or being a CEO – is not a fit for the Searcher and creates undue stress. This is one of the reasons we strongly encourage prospective Searchers to spend as much time as possible – including ideally through internships – with Search CEO’s and Searchers so they go into search “eyes wide open” as to the realities of what searching and running a small or medium business is really like.
The three most important drivers of success in our view are focus, speed, and communication.
Focus. While no two Searchers take the same approach, we see value in focus – namely, in having at any given time, clear investment theses and/or industry ideas that are guiding your search for an opportunity. While some Searchers do find deals through more opportunistic sources, more than two-thirds of our Searchers acquire businesses through a proprietary industry-focused search (source: Endurance’s 2022 “Search Success Factors” Study). Our most efficient Search Partners are able to develop industries theses (in a matter of weeks not months) and network to business owners and “river guides” in those industries. Whether Searchers take a “wide funnel” or a “narrow funnel” approach to deal sourcing, what matters most is that they are having a number of high quality conversations each week with business owners as they continue to compound knowledge about an industry, refine their industry theses, develop credibility within an industry, and network to actionable opportunities.
Speed. It is often said that each week in a search is 1% of the entire search. There is little time to waste. We encourage our Searchers to remain agile and willing to pivot quickly to new industries / theses as they learn more information. There is nothing wrong with moving on from an industry that is not generating opportunities. Most Searchers do not find opportunities in the initial industries they list in their PPM. What matters most is the speed with which Searchers are able to develop ideas, identify owners of companies in those industries, contact these owners, and engage them to explore whether acquiring them is actionable. Our successful Search Partners are able to quickly progress conversations in a matter of weeks not months. Based on our data, we see our successful Searchers generally discussing valuation on the first or second call and then progressing to getting an opportunity under LOI within 6 weeks, on average (source: Endurance’s 2022 “Search Success Factors” Study).
Communication. Finally, we encourage our Searchers to communicate with their investor partners and take their feedback seriously. Many of your investor partners have had prior experience with the industries that you will look at. Engaging them early and often and taking their feedback seriously – particularly if most of your investor partners are saying the same thing – will save you time. Our best Search Partners do this by frequently updating their investors – at all stages of the search, but especially once an opportunity is under LOI – as additional information becomes available and making available “FAQs” of all investor questions so all investors can learn in parallel.
It usually takes six months to two years for a Searcher to find and acquire a company, with an average of ~20 months. Some of our best Searchers have taken materially longer than this; and some have been fortunate to find an acquisition much quicker.
Over the history of ETA there has been a remarkable steadfastness of the search model and consistency in types of businesses Searchers acquire. Recent market disruptions – COVID, inflation, a tightened labor market, and recession fears – have not changed this. Indeed, if anything, recent disruptions have reinforced the merits of the traditional search model, particularly the focus on highly recurring essential service businesses.
Our data around recent deals substantiates this (source: Endurance’s 2023 “Real Search Fund Deals” Study). This data shows that Searchers are acquiring sizeable small and medium businesses ($10mm - $15mm in sales / $3mm - $4mm in EBITDA, on average) that are growing at double-digit growth rates – 14% on average for non-software businesses and 30%+ for software businesses. These businesses have a high degree of recurring revenue (almost all with 60%+ recurring revenue) and high EBITDA margins – 30%+ (for non-software businesses) – driven by a focus on providing differentiated essential services or products. Searchers are finding deals across all sectors, with a growing number acquiring software companies – some 40% in the last twelve months, based on our data.
We view the growth of private equity as an alternative asset class as a positive for the search fund space. While there is now more competition for businesses in some segments of the market (particularly the lower middle market and middle market), Searchers pursuing proprietary opportunities are still differentiated in terms of what they offer to the right business owner, namely an owner who cares about the values and plans of the person he or she is selling their business to.
At exit, most search businesses have been sold to private equity firms or to private equity-backed strategic consolidators. The growth of private equity as an alternative asset class has increased the number of buyers and their willingness to pay for the businesses that our Search Partners are leading creating the potential for material multiple appreciation at sale.
Search CEO’s create value by driving sales, exercising pricing power, professionalizing their organization, expanding margins, deleveraging, and sometimes by acquisition-driven growth. In the first year of ownership, a lot of our Search CEO’s focus is on organizational development including hiring and incentivizing team members; more proactive sales and marketing; and professionalizing operations, especially the finance function by hiring a Controller/CFO, improving the budget planning process, and building a strong working relationship with the company’s lender. As time goes on, Search CEO’s may focus on additional value creation levers including margin improvement, expanding into new product areas or service lines, pivoting the business model, or pursuing acquisition-driven growth. Collectively, over time, these efforts generate value through topline and EBITDA growth, generating cash to pay down debt, and potentially improving the multiple the business is worth at exit. One of the Board’s primary roles is to help guide the Search CEO on how to develop, sequence, and pace value creation initiatives.
The decision to exit a business is one of the most important decisions in the operating phase and is a collaborative decision made among the CEO and the company’s board of directors. We typically hold an acquired business for 4 to 6 years although this varies greatly based on a Search CEO’s goals and market conditions. Our structure as a family office enables us to have a great amount of flexibility in terms of our investment time horizon. We are strong believers in the value of long-term compounded growth. However, we recognize that other search investors as well as Search CEO’s themselves may see value in a shorter hold period so are flexible to optimize hold period for each investor based on the consensus view of all stakeholders and overall market conditions.
70% of Search CEOs, based on our data, remain with their companies for a period after their search investors have exited (source: Endurance’s 2022 “Life After Search” Study of 35+ recently exited Search CEO’s). Once fully exited, exited Search CEO’s overwhelmingly stay within the collaborative search community, either investing or operating. Some choose to acquire another business (often with many of the same partners as the first time around) but the vast majority move to the capital allocation side, either by investing or by overseeing multiple companies through innovative investment vehicles including holdings companies and multi-search platforms.
We have partnered with many of our Search Partners multiple times, helping them navigate and structure their “2nd Acts” after a successful exit of their first Search acquired business.
Endurance Focused Questions
The Endurance team has been partnering with Searchers for 13+ years over which time we have partnered with over 250 Searchers and made over 120 investments in Searcher acquired businesses. We seek to leverage the scale and longevity of our investing experience for the benefit of each of the Searchers we partner with and the benefit of the Search Community as a whole.
Our core values are centered around humility, curiosity, persistence, open communication, and honesty. We believe in embodying these values as operators of companies and seek alignment with our Search Partners through these principles. Humility reminds us to stay grounded and open to learning, curiosity fuels our drive to seek new opportunities and solutions, persistence helps us overcome challenges, open communication fosters trust and collaboration, and honesty guides our interactions with integrity. These values shape our approach to business and relationships, and we strive to uphold them in all aspects of our work.
Our core values of humility, curiosity, persistence, open communication, and honesty shape the way we interact and operate with our Search Partners and Search CEO’s. We are open to giving and receiving feedback and strive for excellence. We are always learning and don't always have the right answer. Our values have created breakthroughs, navigated tough situations, and created financial value and personal growth through collaboration.
We recognize that choosing to pursue a Search solo or with a partner is a highly personal decision. While partnered Searchers do find at a higher rate – about 30% higher, based on our data – and often enjoy the Search journey more, not everyone wants a partner or can find a suitable partner. Each year about a third of the Searchers we partner with are partnered Searchers and the rest are solo Searchers.
Keep in mind that it is never too late to get a partner. A growing number of our Searchers are finding operating partners to join them at the time of acquiring a company. These partners join the business as co-CEO’s, COO’s, Presidents, Chief of Staff’s, or in other executive positions. We have helped several of our Search Partners network to these types of partners at the time of acquisition.
We seek to actively engage with each of our Search Partners throughout their Search journey. More specifically, we seek to be actively engaged at every step along the Search journey, including helping Searchers decide if Search is a fit for them, helping them network within the Search community, helping prepare to launch, reviewing opportunities, negotiating and structuring deals, navigating the due diligence process, connecting Searchers to experts and the community of search due diligence partners, serving on Boards, and helping navigate an eventual exit and “What’s Next” after Search.
Underpinning each of these areas of engagement is our belief in the value of collaboration with the community; the commitment to sharing data from our portfolio and experience that helps each of our Search Partners make more informed decisions; and a recognition that Searchers need not just information but also engaged support to help navigate the inevitable ups and downs of the entrepreneurial journey.
We seek to bring the full value of our team to each Search. This means our full team will be involved in every Search. Over time, a Search Partner may gravitate toward working with one member of the Endurance team more frequently than others, but as specific questions arise that others have expertise in, the full Endurance team is available to engage to support each Search Partner.
We have served on the board of 18 Search Fund companies including several of the most successful search fund companies. Our Partners currently serve on 10 Search Fund Boards and have capacity to join additional Boards. Our team has also added significant value even when not on the Board, including in serving as an ongoing personal advisor to Search CEO’s, coaching on Board and investor dynamics, recruiting senior executives, and networking our search CEOs to industry experts, bankers, lenders, recruiters, and other contacts in our active business network.
There is no “perfect” cap table – only the right cap table for each Searcher. Some Searchers prefer a more concentrated cap table to enable closer working relationships with each investor. Some Searchers prefer a larger number of investors to have access to more points of view and to limit the influence of any one investor. We find ourselves in both types of cap tables.
We do prefer to see a majority of investors in a cap table who are familiar with the Search Fund model. This helps both the Searcher and the investors leverage the Search Fund community. We are open to co-investing with other investors who share our values and investment philosophy and who we believe can bring value to the acquired business.
We also believe that a balanced cap table representing a mix of different types of investors is beneficial. Larger institutional funds can be helpful in closing equity gaps and supporting fast-growth businesses more readily. Family offices like Endurance have a lot of flexibility and are able to move quickly and follow closely with a Searcher from the deal phase through the operating phase. Smaller individual investors require less time investment from a Searcher while providing strategic guidance on specific areas of expertise.
Most cap tables that we participate in strike a good balance among all these dimensions.
Currently, we only partner with Search Funds based in the U.S. or Canada that are searching for companies in those markets.
Yes. We have partnered with several geographically focused Searchers. While any limits to a search – geographically or industry-wise – restrict opportunities we recognize that some Searchers have strong personal reasons for focusing their search. If the additional risks from these restrictions are offset by other factors like strong personal networks locally or the ability to more strongly connect with business owners within a particular geography, we have gotten comfortable with a geographically focused search.
Yes, we have supported numerous more innovative search fund structures including consolidation platforms, holding companies, independent sponsor platforms, multi-search vehicles, and De Novo (“Search to Start”) platforms. Enabled by a permanent capital base as a family office, Endurance has a high degree of flexibility in the structure and time horizon of our investments allowing us to follow talented Searchers into unique and special situations.
We seek to balance growth potential and risk in the deals we back. This mindset allows us to invest in both growth-oriented opportunities and more value-oriented opportunities. We believe that the best outcomes are achieved in industries with favorable tailwinds and common risks that can be mitigated. However, in deals where risks are unique and compounded, we would expect to see higher returns to justify the risk profile. This would require higher growth potential to realize higher returns. Conversely, in deals with common and mitigatable risks, we are comfortable with normal search fund target returns. Ultimately, we strive to make informed decisions that optimize the balance between growth and risk.
As a family office with a high degree of flexibility, we are industry agnostic and open to exploring opportunities across a wide range of sectors and following our Search Partners’ interests. Ultimately, we are most interested in businesses that have a strong value proposition, a defensible market position, and ideally some basis of recurring revenue. However, we are also willing to consider businesses in industries that may be more challenging or require specialized expertise, as long as we believe there is a viable path to creating value.
We typically prefer a deal structure that combines both debt and equity financing, but recognize that the Search Fund model, unlike later stage private equity, does not seek to maximize debt as a source of value creation.
The specific mix of debt and equity depends on various factors, including the size of the acquisition, the growth rate, revenue stability, and overall market conditions. Our aim is to help our Searchers structure their deals in a way that maximizes potential returns while also minimizing risk. In addition to bank debt, we also often encourage our Searchers to consider alternative financing structures, such as earn-outs or seller financing. Our ultimate goal is to help Searchers structure their deals in a way that provides some benefit from deleveraging while not having a balance sheet that inhibits Searchers from investing in growth.
The Endurance team has developed close relationships with the Search Fund lending community. We enjoy helping our Search Partners navigate the process of selecting the right lending partner and optimize their capital structure for each transaction.
We typically invest in deals that fall within the range of $10 million to $30 million in total enterprise value. Deals that are smaller than this (particularly non-software deals) are often sub-scale and under-professionalized, making it challenging for Searchers to “get the flywheel going” to generate value. And deals that are larger than this are often difficult to acquire at reasonable valuations – although when Searchers do find them at reasonable prices – which is happening at greater frequency in recent years – they can make particularly compelling opportunities (source: Endurance’s 2023 “Real Search Fund Deals” Study).
Many considerations go into valuing an enterprise. In general, Searchers are acquiring businesses in this market for 5-7x EBITDA for non-software businesses and 3-4x ARR for software businesses (source: Endurance’s 2023 “Real Search Fund Deals” Study). Businesses valued higher than this require special characteristics and upside. However, we evaluate each deal on a case-by-case basis. We consider a range of factors when evaluating a potential investment opportunity, including market tailwinds, the competitive landscape, growth potential, past financial performance, and the stability of the business.
We invest in the vast majority of deals that our Search Partners find. However, if Endurance does not invest in your deal, we will strive to provide quick and candid feedback. You will not be surprised by our decision. Our interactions with you are real-time, and we will work closely with you as you progress through the deal process. We invest significant time and energy into each deal, with the goal of helping you think through the upsides and downsides. However, if our team ultimately decides that your deal does not meet our investment criteria, we will provide prompt feedback and explain the reasons behind our decision. In situations where we have passed on investing, we have frequently helped our Searchers network to investors for whom the opportunity might be a better fit.
Please reach out! For anyone contemplating a traditional search, our team welcomes the opportunity to connect with you and hear more about your interest in search. We would also encourage you to check out the Resources on our website where there are some 250+ publicly available resources on search.
We look forward to speaking with you!