How search funds look at underperforming main street businesses

Depends on the fund. Some are pure operators, some are finance guys. Underperforming usually means they think the business is stable but not optimized. They want cash flow they can improve.

Search funds typically have a searcher who just finished MBA, backed by investors. They buy one business and run it themselves. So they're not flipping. They need something with a real team and recurring revenue, just weak growth or margins.

My husband sold his HVAC company to a search fund last year. They paid a fair multiple and kept everyone. But the searcher was young and had never managed techs before. It's been rough on culture.

Underperforming can be code for 'we think the owner is lazy.' Not alwayS true, but that's the lens. They look at owner add-backs, customer concentration, and whether the business can run without you.

If you're flat for three years, they'll ask why. Is it the market, your pricing, or you? Search funds want a clear reason for underperformance that they can fix, not a structural decline.

Also watch for letters that are basically mass mailers. Real search funds usually get introduced through brokers or direct outreach after research. A letter alone doesn't mean much.

Agree with cactus. But some searchers do direct mail to owners in their target industry. It's a numbers game for them.

What multiple are they offering? That's the only thing that matters. If they're talking 3x earnings for a service business, that's low. 4-5x is more normal for a small commercial cleaner.

Ours was was 4.5x seller discretionary earnings. But they wanted a note and an earnout. So not all cash.

The underperformance angle also means they'll want to see your books cleaned up. If you've been running personal stuff through the business, they'll adjust for that. Might be worth talking to a broker before you engage.

Good plan. And don don't sign an NDA or exclusivity just to talk. Plenty of searchers will waste your time.