We Look At All Industries
The search fund industry has found success in buying a certain kind of business, and unless you bring deep domain expertise in an industry that falls outside of the usual bounds, it’s best to stick within them.
The typical industry criteria have been framed in various ways by investors and searchers, but the different takes are usually directionally aligned.
Will Thorndike, one of the search fund world’s most respected investors, list the three primary attributes he looks for in a deal:
3 Primary Attributes
- Industry Growth
- High Return on Tangible Capital
- Recurring Revenues
Business Characteristics
Industry
- Growth industry
- Lack of dominant competitors or customers
- Limited landscape risk (including technology obsolescence, regulatory risk, legal risk, environmental risk, major cyclicality, fads/trendy)
- Low operational complexity
- Profitable, not in decline, and attractive to lenders
Company
- Growth potential via organic sales growth, geographic expansion, product/service extension and follow-on acquisitions
- Strong middle-management willing to remain
- Motivated seller for non-business reasons
- Long product/service life cycles, not subject to rapid technological change or obsolesce or requiring substantial additional R&D
- Product/service differentiation exists or can be created
- Stable contractual relationships
- Reasonable valuation
Financial
- Predictable, stable, and recurring revenue
- History of profitability, currently generating $1-5 million of EBITDA
- Strong EBITDA margins
- Low to moderate capital intensity, creating the ability to generate high returns on tangible capital
- Cash flow and assets sufficient to attract and service proposed capital structure