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Can Search Funds Ease the Family Business Succession Crisis?

Sept 5. 2019 Family businesses and family offices face an impending succession crisis. Entrepreneurs without children or those who’ve been unable to convince the next-generation to take up the reins are left with no obvious successor in place.

The problem seems to be pervasive across the globe. Asian family businesses without a successor are estimated to be collectively worth $22 trillion, according to Bloomberg. The Nikkei Asia Review reported in 2018 that 1.3 million Japanese businesses were at risk of folding due to a lack of a successor. Meanwhile, 85% of small and medium-sized U.S. businesses don’t have a succession plan in place and 49% of Canadian SME owners plan to retire in five years or less, according to data published by Project Equity and the Business Development Council.

Left unaddressed, this trend could diminish the immense value created by family businesses across the world. However, a relatively niche investment vehicle that addresses the issue is gaining momentum – search funds.

Search funds are private equity funds focused exclusively on acquiring small or medium-sized businesses with no obvious successor for a retiring business owner. A significant portion are launched by recent business school graduates who raise funds from high-net-worth investors and institutions to buy small companies and install themselves as the business owners.

Professor Irv Grousbeck, from the Stanford Graduate School of Business, first conceived the concept in 1984. Since then, 325 search funds have been launched, generating an average annualized return of 33.7% for investors, according to a report published by Stanford. The study also found that the number of funds being launched is steadily expanding – a record high of 86 was launched in 2017 alone.
Combining investor capital with business school talent and retiring entrepreneurs could be an effective way to deal with the brewing global succession crisis.

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