At Arada Capital Partners, every week we talk to talented entrepreneurs who are preparing to launch or have already launched their Search Fund. They are following an entrepreneurship through acquisition path.
In all these meetings we are fortunate to learn new things that help us to have a much broader vision and to give an additional added value to new Search Funds. With these conversations we enrich our knowledge of the Search Fund ecosystem.
Below we share with you a meeting Javier Puig had last week with Javier Poveda, Managing Director of Almond Capital. In this excerpt from the conversation, Javier reminds us of the importance of alignment with the seller of the company to be acquired. There are many mechanisms that can be used to align the interests of all parties, but as Javier says, it is important to analyse and understand the circumstances surrounding each target company and its owner.
Javier Puig: What are the seller main motivations for selling? What factors should a Search Fund analyse regarding the sellers objectives or needs?
Javier Poveda: Every businessman who wants to sell his company has a different motivation and a different vision of his future. They are the real protagonists of the story and a key point in any Search Fund acquisition.
In the first stage, as in a Maslow pyramid, the seller has different survival factors: securing long-term wealth and ensuring the well-being of their families through diversification. By selling the family business when there is no natural successor, the businessman can diversify the capital obtained from the sale into different sectors or investments, and even keep part of it in the company he created, built up and now sells.
In a second stage, the seller will seek to ensure that the history of the company continues, that his legacy continues and that the company he founded grows while maintaining the pillars he established. With this goal in mind, the seller will seek to leave the company in the hands of a buyer who care for it as he did. Therefore, it will also be very important to organise a structured transition, where empathy between the founder and successor-searcher has a great importance.
The aspiration of a full retirement is not just about the cash outflow, but also includes higher aspects that searchers must analyse and understand to facilitate the acquisition of the company. Alignment with the seller’s objectives is a critical part of the acquisition.
Javier Puig: In this sense, when we talk about aligning objectives with the seller, what can a Search Fund bring on top of the table that a Private Equity or industry competitor cannot?
Javier Poveda: The first stage I was talking about in the previous question can be given by any potential buyer. Economically speaking, the market is efficient in that sense, although extreme offers always have a trick; buyers use them to dazzle the seller with a multiple X and thus rule out other candidates.
I would argue that the key is in the second part: different types of buyers bring different circumstances. For sellers who value the legacy of their company and its history, a Search Fund can be a fantastic acquisition-partner because the focus is always on the company.
The Search Fund can be very flexible in structuring the deal and the alignment of interests is usually maximised. The Searcher, together with its investors, simply takes over to start a second phase of growth of the acquired company, respecting always the culture and foundations established by the founding businessman or seller. That culture and those foundations have proven to work very well for many years, it makes sense that the next phase of growth builds on them.
In the case of an industrial buyer, the key player is the parent company that takes over the company in question. In the case of private equities, the day-to-day involvement of the latter is limited and is often structured through the management committee. In the case of a Search Fund, the searcher becomes the new CEO, ensuring that he will be on the ground on a day-to-day basis, the value contribution is immensely greater.
Javier Puig: Searchers typically looks for companies in very different sectors, they are considered to have a sector agnostic search. How does a searcher prepare for a serious conversation with a seller and demonstrate the necessary industry and business knowledge?
Javier Poveda: I believe in specialisation. I believe that searchers should have sectors of preference based on their backgrounds; there is no research that can replace in-situ experience. In addition to knowledge, when two professionals from the sector sit down to talk, people in common from the industry that both employer and searcher know come out to the conversation, stories from the industry, etc. All this generates empathy in both directions that is very positive for the future negotiations and alignments of interests.
Javier Puig: How do you gain the trust of the seller to make him believe that you will be capable of managing his company in the future? How will you win over the company’s staff when the time comes?
Javier Poveda: I believe that being both 100% authentic and competent are key factors.
Authenticity is very important because in the end what this type of sellers are looking for, is a successor who shares the same way of seeing the world and who works with the same values.
The Search Fund’s competence and knowledge of the sector generates confidence in the businessman who is selling, as the baton is passed on to someone who knows the business and shares the same passion for the product/service. The same goes for former employees of the company, they will be looking for a competent decision-maker from the very first day.
Javier Puig: How do you know if a seller is really motivated to sell?
Javier Poveda: The enemy of the sellers is the lack of time. Time to visualise their future and time to find the right successor. Often, there are sellers who have started to think about a potential sale of their company but have not yet matured it. In these cases, when there is real excitement and the potential sellers starts seeking for a vision of not only his future, but also the future growth of his company, then I believe that it is a good moment to start a serious conversation with them.
At the other extreme, if the seller is very proactive in selling but all they focus in is a price or valuation of their company, for us it is a clear sign that they have no interest in the future of their company. Without this interest, the alignment and structuring of the management handover will be very difficult.
Javier Puig: When you identify a good target company and a seller who is willing to sell, how do you think is the best way to structure the buying process?
Javier Poveda: I think it is a shared effort: “let’s do it together”. It is good to have visibility of all the different steps involved in a typical transaction and to approach it together. In case they are not familiar with it, you must explain to them what phases and milestones are involved in an M&A transaction like this.
It is also very important to talk openly about the concerns of both parties, and to help each other mitigate those risks or concerns as quickly as possible.
Javier Puig: How do you coordinate the opportunity with your search fund investors?
Javier Poveda: Each investor brings a different value to Almond Capital. Having fluid communication and knowing who to call and when to call, is important to optimise each investor’s time.
In my case, since I started the search period, everyone is up to date on how the process is progressing and everyone has their doubts or opinions that help me to reflect on things I hadn’t realised, or that help me to better structure the details of the operation.
Javier Puig: Once a Searcher acquires the company, what role does the former owner have to play in this second phase of the company’s growth? What degree of involvement will the founder or former owner of the company maintain in the future?
Javier Poveda: I believe in structured and carefully planned transitions. Entering a company and trying to start many plans/ actions from day one is a guarantee of failure. I like to see owners taking care of the transition process, accompanying the successor/ Searcher and gradually stepping back. It takes time for the successor to be able to fully replace the founder.
I look for structures where both parties are comfortable, structures where parties also complement each other and walk together through the transition. That is why I believe that empathy between the seller and successor is key. If this does not happen, there will be serious problems.
This model is about people, and therefore not just any Search Fund is the right partner for the company in question, and vice versa.