Investing in search funds is becoming an increasingly attractive option. Many investors come from successful professional or entrepreneurial backgrounds, which leads them to believe that investing in a business they understand and can influence is preferable to relying on financial markets and speculation.
Many of these investors already have experience purchasing “tickets” in search funds to acquire SMEs, but not all of them are fully aware of what steps are necessary to keep their investment properly protected.
Based on our professional experience, here are several key recommendations:
1. Invest with someone who has done it before: You may be able to fully fund the investment, but if this is your first time and you are unfamiliar with the market, it is advisable to co-invest with someone experienced. They can help you assess whether the searcher’s profile is the right one.
2. Spread the investment: Initially, cover the search costs, but do not disburse the acquisition capital upfront. If the capital is available from the beginning, the searcher may feel pressured to acquire a business they do not fully trust simply to deploy the funds. Capital commitment and capital call are not the same.
3. Design a robust legal structure: It is essential to properly define the legal terms and clearly determine who manages the company and how risk is allocated. A well-designed structure will protect you. We have seen cases where searchers lose motivation or are no longer suitable, making a proper transition of the searcher or manager necessary.
4. Adopt a mentor role: Ideally, the investor’s role should be that of a mentor, not just a capital provider. Having this figure on the board of directors allows the searcher (often a young professional, with many MBAs choosing this path) to be guided and advised by people who have already faced real business challenges.
5. Define clear selection criteria: Carefully decide which criteria will guide the search. This ensures a clear direction. If you deviate from the fund’s general investment thesis, make sure you have a clear and well-founded reason.
6. Address the possibility of an unsuccessful search from the outset: This allows you to limit risk and structure the process around milestones, avoiding capital deployment in unproductive activities.
7. Align incentives (vesting): Searchers typically do not receive equity from day one; instead, they earn it progressively as certain milestones are achieved.
Investors must protect themselves properly, both by carefully selecting the searcher and by designing the legal structure and choosing the right investment partners.
At Navas & Cusí Abogados, we are experts in Commercial Law and search funds. If you are considering entering this model, put our experience to work for you: we can help you secure and protect your position.
