Unveiling the first comprehensive analysis (2012, Kessler) of unsuccessful Search Fund acquisitions and a follow-up analysis by Yale (2020, Wasserstein) offering valuable insights for investors and entrepreneurs.
Ideal Search Fund Model Components
Industry Criteria
- Growth > 5% annually
- Gross margins > 20%
- EBITDA margins 10-15%
Business Characteristics
- Simple operations
- Differentiated product/service
- Customer concentration < 25%
- Multiple end markets
- Attractive geographic location
Searcher Requirements
- Transparency with board
- Learning orientation
- Leadership ability
- Operational focus
Capital Structure
- Total debt < 60%
- Limited seller financing
- Cautious use of earn-outs
Study Context & Methodology
Comprehensive Analysis
First comprehensive study of unsuccessful Search Fund acquisitions since the model's 1984 inception
Extensive Coverage
Analyzed 22 out of 30 known unsuccessful acquisitions (73% coverage)
In-depth Interviews
Conducted 29 interviews total: 15 interviews with Search Fund operators, 14 interviews with Search Fund investors
Failure Definition
Definition of "unsuccessful": bankruptcy, no/negative return to investors, searcher release/resignation
Confidentiality
Maintained confidentiality to ensure honest feedback from participants
The Stats
Closed Acquisitions
Despite initial success, some searches fail to close.
Loss-Making Acquisitions
A significant percentage of acquisitions result in losses for investors.
Partial Loss
Most losses are partial, indicating some return for investors.
Total Loss
Total losses, with no return for investors
Types of Searchfund Failure
The No-Dealer (31%)
Searchers fail to complete an acquisition after searching.
- Never completes an acquisition after searching
- Considered the best of the "bad" outcomes
- Allows relatively quick pivot to other opportunities
- Limited financial downside since only search capital is lost
- Main challenge is emotional/psychological rather than financial
The Imploder (of the 69% that close, 20% implode)
Businesses deteriorate rapidly after acquisition.
- Makes acquisition but business deteriorates rapidly
- Results in significant/total loss of invested capital
- Entrepreneur gets salary but no equity compensation
- Challenges include operational issues, debt problems, market changes
- Better to fail quickly than slowly if heading this direction
The Drifter
Businesses stagnate without growth after acquisition.
- Business acquired but stagnates without growth
- Meets basic obligations but creates no equity value
- Considered worst outcome as it can waste prime career years
- Entrepreneur may stay too long hoping for turnaround
- Recommended to exit quickly if stuck in this pattern
Key Themes of Failure
Low/Negative Industry Growth
The most common reason for failure, affecting 72.7% (16 cases) of the study.
Complex Operations and Board Dynamics
Second most common theme, highlighting challenges with operational complexity and board management.
Insufficient Due Diligence and Strategic Misalignment
Inadequate due diligence and misalignment between the searcher's vision and the acquired company's potential.
Key Themes of Failure
Low/Negative Industry Growth (72.7%)
Complex Operations (63.6%)
Troubled Board Dynamics (59.1%)
Low Gross Margin (45.5%)
Execution Failure (45.5%)
Ranked by frequency, these themes represent the primary factors contributing to Search Fund failures.
Low/Negative Industry Growth (72.7% - 16 cases)
Definition
Defined as industry growth of 5% or less
External Shocks
Natural disasters, 9/11, recession
Product/Service Obsolescence
Outdated offerings in changing markets
Acquisition Challenges
Attempted growth through acquisition in slow markets
Complex Operations and Board Dynamics
Complex Operations (63.6% - 14 cases)
- Operations beyond searcher/management team capabilities
- Retail space management
- Roll-up strategy challenges
- Manufacturing technical requirements
- Geographic distance between sites
Troubled Board Dynamics (59.1% - 13 cases)
Searcher Issues:
- Lack of transparency
- Late/incomplete board materials
- Resistance to board advice
Board Issues:
- Insufficient time allocation
- Inadequate operating experience
- Collusion among board members
Post-Failure Outcomes
Financial Impact
- Above median MBA salary: 33.3% (5 searchers)
- At median MBA salary: 13.3% (2 searchers)
- Below median MBA salary: 53.3% (8 searchers)
Career Paths
- Search Fund entrepreneurship
- Traditional corporate roles
- Wealth management
- Search Fund investing
Intangible Consequences
Negative: Emotional/physical stress, relationship breakdowns/divorce, industry change necessity, network rebuilding
Positive: Long-term investor relationships, follow-on fund opportunities, valuable life lessons, professional growth
Industry-Specific Failure Themes
Manufacturing
The most challenging industry, with all nine failure themes present.
This indicates vulnerability across all potential failure points.
Retail
Second most challenging, with eight of nine themes present.
Missing theme: "Inability to retain/hire adequate talent."
Business Services
Most forgiving, with only five of nine themes present.
Absent themes: "Low/negative industry growth," "Complex operations," "Low gross margin," and "Inability to retain/hire adequate talent."
Success Factors & Recovery Paths
Success Factors
Proper due diligence is critical. The importance of industry selection and growth potential is paramount. Adequate capitalization, strong relationships with the board and investors, and a clear understanding of operational capabilities are all essential.
For Entrepreneurs
Distinguish between project failure and personal failure. Take time to process and learn from the experience. Maintain work-life balance and outside interests. Be transparent with stakeholders, and exit gracefully if things aren't working.
Recovery Paths
Most entrepreneurs take 6 months off to reflect and reset. Common next steps include roles in private equity, venture capital, consulting, or operating roles. About one-third earn above the MBA median salary after. Many remain in the entrepreneurship and search fund community. Investors often remain supportive if the entrepreneur acted ethically.
Searchfund Failures: Takeaways for Business Acquirers