Search Fund Budgeting

I spent June 2023 raising money for my search fund. One of the areas I felt most uncertain about was how much money to raise and what to earmark the funds for. This newsletter reveals what I raised and what I wish I had known as I was fundraising.

Keep in mind that this post applies to doing a search fund, not self funded search. The money I raised covers the expenses associated with two years of searching and does not contain any capital for the acquisition itself. Thus, I get a chunk of money at the beginning of my search, and that number goes down as I draw salary and other expenses (travel, software subscriptions, etc.).

Investors who funded my search get right of first refusal on the company that I acquire. If I don’t find a company to buy, they don’t get any return on their investment. It’s typical for a person doing a search fund to have ~15 investors (I have 16), so the check size from each investor is relatively small. For search fund investors, funding my search is a call option and a bet that I’ll find a high quality company to acquire.

My Search Fund Budget

When writing a PPM (the document that’s effectively your pitch deck when raising money for a search fund), you’re expected to provide a budget for the search. I had given some thought to my salary, but I had no idea how to estimate the other expenses. To make an educated guess, I looked at the PPMs of searchers, and two of my lead investors (Anacapa and Peterson) provided some broader anonymized data.

It’s worth noting that I was fundraising from a position of extreme privilege: people from top MBA programs (especially Harvard and Stanford) have an easier time raising a search fund, and my 14 years of work experience post-MBA also helped. All of this meant I had strong interest in my search and was in a better position to ask for a larger salary and search fund.

The summary budget below is from my PPM - subsequent sections double-click into why I estimated what I did for each category.

SALARY & PAYROLL

The 2022 Stanford search fund study includes compensation data, and I saw that the max was $200,000. I aspire for my search fund to be record setting but not when it comes to my salary. The request for $200,000 still raised a few eyebrows - from what I could gather, the median salary in 2023 is around $125,000.

I found investors were receptive to a higher number as long as there was context around it. My story was basically “I’m mid career and have higher fixed costs; this is a lean salary for me.” Adding in that this was x% of my salary at Meta also helped. I found that investors wanted to see that the salary was lean but didn’t put me or my family in a tough place. Again, I was lucky to be raising from a privileged position where I could make an ask like this.

I used 15% for payroll taxes because I saw the same in other PPMs. I’m fortunate to be on my wife’s health insurance, otherwise I’d have budgeted an extra ~$10,000 / year for insurance.

TRAVEL

Something an investor said during fundraising that stuck with me: there’s a strong correlation between unspent travel budgets and searchers who don’t acquire. Doing a search fund is an exercise in creating connection with potential sellers, and creating connection is best done in person.

I wanted to ensure I could travel liberally and afford events like industry conferences. I went with the high end of what I saw in other PPMs, and I figured that ~$3,000 / month would support multiple trips per month, even if they were across the country.

BROKEN DEAL COSTS

Here I again went with the upper range of what I’ve seen from other search funds. Legal fees are not part of broken deal costs (more on that below); the primary costs would be related to due diligence. Quality of Earnings (QoE) is the largest of these expenses - a QoE report can be between $20,000 - $30,000, and this amount is due regardless of whether I go through with purchasing the company.

I assumed one broken deal / QoE report per year.

INFRASTRUCTURE

This was the category I had the hardest time estimating, as I was unsure about both what would go in this bucket and what it would cost. I knew that I wanted to pay my interns and not think too hard about getting best-in-class software for outreach. I also wanted to be able to afford some paid research. Most searchers (me included) try to be scrappy about research and avoid paying experts, but I wanted to have the cushion to be able to afford this occasionally if necessary.

PRE-FUNDING / CONTINGENCY

For pre-funding, I knew my up-front legal costs would only be $5,000. Any legal fees from broken deals would be rolled into the eventual transaction. If no transaction happens, the law firm incurs the costs. (This is a generous deal for the searcher; the law firm does this as a relationship building investment. Typical legal fees for a transaction are ~$300,000, and the law firm usually ends up representing the company after the transaction.)

The rest of the $10,000 for pre-funding was for setting up my website and paying for incorporation costs for the LLC.

Contingency is for….well, contingency.

Lessons Learned

I’ve now been searching for about four months, and this week I sent my end of Q3 update to investors. (Most searchers send an end of quarter update that summarizes search activity and budget vs actuals.) Here’s what I’ve learned thus far looking at my Q3 Budget vs Actuals:

• Salary and Payroll: these two line items combined came in 7% lower than expected.

• Travel: I under-spent in Q3, but I’m not surprised, as my outreach was not up and running until the end of the quarter. This still feels comfortable, and I’d do the same if raising again.

• Broken deal costs: I have yet to go under LOI, so this has not been needed yet.

• Infrastructure: I was 42% over budget in Q3, but this was largely due to paying annual license costs for some of my most expensive software (Grata and Reply). I’m still not sure what my steady-state needs are here, but the estimate still feels good.

• Pre-funding / Contingency: My pre-funding costs were ~$8,000, and I have yet to use any of the Contingency funds.

Let me know if you have any questions about use of funds or ideas about fundraising that you’d like to see in future newsletters.

ETA Course

If you’re interested in going deeper on Entrepreneurship Through Acquisition, I’ll be teaching a course in November. The goal of the course is to deeply understand the different methods of participating in ETA and choose the one that’s best for you. It’s a live, cohort-based class where you’ll have a peer group to learn with and learn from.

You can learn more about the course and sign up for updates here.

If you have questions about the course, you can set up time to discuss with me here.