SFA’s Economic model puts searchers first
People often say, “So, what’s the catch?” They assume that in order to provide all that support to searchers and CEOs, the economics SFA offers must be inferior to those of the traditional search fund model. Nothing could be further from the truth! SFA’s founding premise was that, by increasing the size of the pie, SFA searchers could enjoy significantly better economics than those following the traditional model. There are four principle advantages:
25% equity in the acquired business
No preferred return to SFA (typically 8%)
No “step-up” on search costs (typically 50%)
Lower transaction costs
A simple financial model will prove the value of these benefits, particularly the absence of a preferred return. But the impact is even greater when you take into account the comparative probabilities of success: 90% at SFA versus only 30-40% for the traditional search fund model. Do the math and you will see that the expected financial gain for SFA searchers is in a league by itself. And that is exactly how it was designed. But there is more...
No search fund investor is more incentivized to help its searchers succeed.
It’s real simple: The SFA team only makes money if our investors make money. And the only way our investors make money is if our searchers make money. Consequently, we focus all our efforts on helping our searchers and CEOs succeed.
In creating SFA, we went to great lengths to ensure that everyone’s incentives are aligned. SFA eliminates the distortions of the traditional search fund model that create asymmetries that put searchers’ and investors’ interests at odds. At SFA, we are truly all in the same boat, rowing in the same direction. But there is even more...
The Common Fund
In exchange for a small portion of their 25% equity in their business, each searcher gains an equivalent share in the businesses acquired by the other members of their cohort. This is known as the Common Fund. Our searchers and CEOs appreciate this community benefit tremendously.
The Common Fund creates an economic incentive for cohort members to help one another successfully find, acquire, and grow companies. It also perpetuates the bonds between searchers once they become CEOs by giving them economic interests in each other’s businesses. And it offers CEOs a small amount of diversification of their investments.
Search fund economics can be complicated to understand. But, since embarking on this path could be the most important financial decision you have made in your life, it is well worth taking the time to understand the subtleties of the different models. When you do, you will fully appreciate the value SFA proposes.