The essence of entrepreneurship through acquisition – episode 2

Starting out in business doesn’t have to mean creating a company from scratch. Buying a company out is also an option. But how often does this happen? And what are the pros and cons for future CEOs, investors and intermediaries?

Diving headlong into this fascinating subject are Vlerick’s own Professor Miguel Meuleman and international buyout specialist Timothy Bovard. A former professor at INSEAD and Columbia Business School, Timothy was a guest speaker at our very first Mergers, Acquisitions and Buyouts Conference in 2012. Now, ten years later, he offers insights and perspectives on acquisition as a route to entrepreneurship.

In 2015, Timothy founded Search Fund Accelerator, an investment firm building further on the historical search fund model and that focuses on micro-LBOs. It pairs talented potential CEOs with businesses that have significant potential for growth. He coaches them throughout the search, due diligence and acquisition processes and unites them with investors providing the equity for the transaction. Miguel is Professor of Entrepreneurship and Director of the Vlerick Entrepreneurship Academy.

Listen in to this second of four Insight Talks to discover how to be successful as an individual buyer, and to learn about the various options to fund your acquisition. Or go back to episode one, if you missed it.

The essence of entrepreneurship through acquisition – episode 2

In this second of four Insight Talks, Professor Miguel Meuleman interviews international buyout expert Timothy Bovard on how to be successful as an individual buyer and the various options for funding your acquisition.

The Belgian market for corporate acquisitions and M&A has become a crowded space. We have a lot of private equity firms moving into the small deal segment, we have family offices buying companies, and we have all kinds of other players investing in these small targets. A lot of money is flowing into the market. So, how can you as an individual still be successful in buying these companies?

Timothy Bovard: “It is challenging in a market where there are so many actors looking at these smaller acquisitions, but I believe that a buyout entrepreneur can be successful by creating a personal relationship with the owner. Many owners have had these businesses for 20-30 years and they can be considered family-style businesses. If the owner is interested in selling, that means they don't have a daughter, a son or in-laws who could take over the business. I think the vast majority of them are looking for somebody who they can trust. Someone who will take care of their people, their clients, the reputation, or the Legacy that they've built. So building that particular special relationship with the seller is important. I think that's how you win as a buyout entrepreneur.”

And would you advise people to take the seller on board once the company has been bought? Or is it very case-specific?

Timothy Bovard: “I think it's good that the seller is available in consulting mode or part-time work for the first six months, but beyond that, I've rarely seen it work. Generally, shortly after the acquisition, the CEO wants to put his imprint on the company, and you can't do that while the shadow of the former owner is still looming over the business and over the people. So I think you need to plan on the seller exiting sooner rather than later.”

One of the big trends we have seen in the US for many years, and which is slowly spreading into Europe as well, is the search fund model. It’s a very specific model to help individuals buy companies. Can you explain what this model exactly is? And what’s the rationale behind it?

Timothy Bovard: “The search fund model is a way for recently graduated MBAs – started in the United States – to acquire a business. Obviously, they don't have a lot of capital available. So the idea was that a searcher goes out and raises some $500,000 from a pool of 15 investors who each invest around $30,000 and that pool of capital funds a two-year search, covering salary, office and search costs. When the searcher finds a business to acquire, they put together an investment memo and go back to the original investors who have the option to now invest a larger sum of money ($300,000 to $500,000) to participate in their pro-rata share of the final acquisition. That gives the ability for the entrepreneur to buy a company by putting in zero capital of their own but having the possibility of earning up to 25% of the capital gains generated by the deal through the life of the transaction. So it's a fair trade. The investors are getting the benefit of deal sourcing, deal acquisition and management and the entrepreneurs get the benefit of having some financial backers and being able to make significant financial wealth if they succeed, without risking any of their own capital, which most of them don't have in the beginning anyway.”

What we see more often in Belgium is a self-funded search. Typically, someone

would give up their job, would then start to look for a company, of course without any salary, maybe taking some consulting jobs in the meantime. What is the difference between these two models? Because it's also a matter of putting the money where your mouth is.

Timothy Bovard: “The idea behind the search fund model is that these individuals have high-potential careers, to begin with. Particularly, if they're coming straight out of an MBA programme where they have career placement services, that could help them in securing very lucrative jobs. By risking their career on a two-year search, they forgo that. It might not be in cash dollars, but I think they are putting their financial future on the line.”

Discover more insights on entrepreneurship through acquisition in episode three of this Insight Talks series.