Before Launch Series: Part 1
Administrative: The necessary foundation
Welcome to Part 1 of the Before Launch Series, where I will walk through practical tips to help searchers set up their funds and get in front of owners more quickly. Part 1 assumes you have completed fundraising but have yet to call capital to start your search. For self-funded searchers and other types of entrepreneurial buyers, most of these administrative elements should still apply.Â
One disclaimer I’d like to share is that this post is in no way recommending any of the tools or providers you need to be using for your search. My goal is to make you aware of what you’ll need and some of the options that are out there. We all have our own style and objective during this process, and I will leave it up to you to determine what makes the most sense for your own search.
Locking down an attorney and accountant
If you have not found an attorney to represent you at this stage, you will need to find one to help formalize the legal agreement between you and your investors. There are law firms that know the search fund ecosystem and have worked with searchers and their investors in the past. The ones that appear to be the most popular amongst the search fund community are BakerHostetler, Sidley Austin, and Goodwin Procter. Once you engage with one of these firms, they will help you form your LLC and investor packet that includes elements such as the A&R LLC agreement, subscription agreement, investor questionnaire, and a few other documents.
It might also be helpful to engage with an accounting firm early in the process as well. They will assist searchers with year-end tax reporting and Schedule K-1 documentation that needs to be shared with investors. Boulay is a popular choice amongst searchers I know, as they have worked with the search fund community for some time and have relationships with many of the traditional investors. That being said, there are many others that you could use to provide this service. Remember that you will eventually need to hire a Quality of Earnings (QoE) provider, so it is important to engage with those folks early on to develop the relationship sooner rather than later.
Setting up a bank account
Once you’ve formed your legal entity with a valid EIN number, you will be able to set up a business checking account. After discussions with many searchers and investors on setting up a bank account, there appears to be a common theme: staying away from large national banks. Most searchers I’ve talked to have used smaller regional banks such as BankProv and Live Oak Bank, as they are familiar with search funds and have better customer service in the event you run into any issues.Â
A smaller bank’s main advantage is related to the capital call – you will work with a representative to ensure there are no freezes on your account when investors try to wire hundreds of thousands to you on short notice. I have heard of instances from searchers that used large national banks such as Chase and had their accounts frozen during the capital call. If that does happen, it helps to have someone who you can quickly reach out to for assistance.
Deciding on a tech stack
My hot take is that prospective searchers spend way too much time deciding what their tech stack will be. Do what works best for you and tweak as needed, but the tools and systems that you subscribe to will not be the primary cause of cash burn from your search fund. You want to have a set of tools that help you communicate efficiently and effectively and manage owner relationships, workflows, and email campaigns. While you may already be familiar with many of these tools, you can trial most for free, usually for 1-2 weeks before hitting a paywall.
Here’s a list of my tech stack with other alternatives for those looking to explore their options:
Communication Tools
Email Outreach: Reply.io (others use Hubspot, Outreach.io)
Video: Zoom (others use Microsoft Teams, Google Meet)
Phone: Google Voice
List Building
Private Company Data: Grata (others use ZoomInfo, SourceScrub)
Email Verification: Hunter.io (others use Apollo.io, NeverBounce)
Managing Relationships
Admin
Payroll: Gusto
Accounting: Quickbooks
Screen Recording: Loom
Storage: Google Drive (others use Dropbox, Box)
Grammar and Editing: Grammarly
Marketing
Website: Webflow (others use SquareSpace, Wix)
Brochures and Other Creative Content: Canva
Gathering useful templates
An area that can save you time setting up is by gathering useful templates from other searchers and investors in your cap table that will help you manage owner relationships, hire and manage interns, and evaluate deals.
Here’s a list of my templates you should prioritize getting and where you can find them:
Legal
Non-disclosure agreements (NDA), one for interns and two for business owners (one short form, one long form)
Source: Attorney, investors
Indication of interest (IOI)
Source: Attorney, investors
Letter of intent (LOI)
Source: Attorney, investors
Evaluating deals
Objective qualifying of industries and companies (scorecards)
Source: Business school classmates and coursework, searchers
Cohort analysis
Source: Google, searchers, investors
Historical financial performance
Source: Business school coursework, searchers, investors
Simple leveraged buyout (LBO) model
Source: Business school classmates, searchers, investors
Deal teaser to inform cap table
Source: Searchers, investors
Communication
Email campaign examples
Source: Searchers, investors (Note: can be challenging to acquire)
Quarterly update to cap table
Source: Searchers, investors
Marketing
1-pager for business owners and brokers
Source: Searcher websites, searchers
Familiarizing yourself with lenders and diligence providers
There will be many 3rd parties involved later on in your search, especially one you are in the due diligence process after executing an LOI. It is helpful to gain an understanding of the landscape before you dive into the search and the potential providers you may need to tap into later on. The key areas of diligence where you may bring in outside help are the following areas:
Quality of earnings
Providers: Boulay, Intrinsic, Baker Tilly, Moss Adams, Taqitz, Greer Walker
Tax
Provider: Mowery & Schoenfeld
Software
Providers: Spellbound, Corsis at Crosslake, Accolite Digital
Risk and Insurance
Providers: Oberle Risk Strategies, Oswald Companies, Woodruff Sawyer
Customers
Provider: Whizdom
Healthcare
Provider: Marwood
Environmental
Provider: Partner Engineering and Science
Depending on the expected capital structure of your acquisition opportunity, finding the right lender will be a crucial element of the diligence process. That being said, it helps to introduce yourself to many of the lenders early on to get a sense of where certain ones may be a better fit compared to others. Here are some of the prominent lenders that are involved in traditional search acquisitions:
Networking
To state the obvious, it’s critical that you continue to network with those in and around the search fund community. Connecting with searchers can be an opportunity for you to learn from those who are only a few months ahead of you, so you can avoid some of the mistakes they may have made early on. Also, it’s an opportunity for you to gain a perspective on how you might sell yourself to business owners in your initial conversations. At this time, you should be tailoring your conversations to address the pain points you are dealing with and not worry as much about the later stages of the search fund lifecycle, as exciting as they might be.
Investors may provide a list of resources to searchers to help them set up their funds, but I would not lean on them too much. For most, fund ramp-up is not their speciality, and you will likely get more value out of figuring it out by yourself or through networking with searchers. That being said, some investors do provide searchers with boot camps to get ramped up, so do ask if those resources are available as early as you can in the process. I found that investors can be most valuable for introductions to other searchers who are just a few months ahead of you.