An increasing number of searchers return to their “home country” to launch a search. This post is based on input from over 20 international searchers who have launched within the last 5 years and share their experiences and reflections in order to help searchers make an “informed” decision about taking this step. No matter what country you are searching from, these lessons and observations may apply to your own journey.
IESE in Spain holds an annual search conference and has published some statistical data and observations on Non-USA based searches – (See IESE Report – International Search Funds – 2016).
Why search in your home country?
For many, searching in their own country is a personal choice, perhaps embodied most by Lionel Peralta, from Costa Rico, who simply says, “quality of life”. For others, there is a strong desire to be near their family of origin, a spouse or to raise a family in the country of their birth. A few others cited the challenges of immigration laws that make it difficult to remain in another country, where they may have been educated or had an early start to their career.
The second most frequently cited reason is their “network” of contacts within a country, as Zack Belzberg at Northmont in Canada says, “I wanted the natural advantage of utilizing my personal network.” This will be useful for identifying owners and certainly for access to investors. Lionel Peralta also observes “all transactions are relationship-based in Costa Rico.” Also, like many others, Max Silver of Euston Capital in the UK found that “good understanding of local markets is important for search.”
Other searchers cite the opportunity in “less developed” countries for more rapid growth, as Bernardo Garza at Arroyo Capital believes “Mexico has an interesting combination of immature, fast growing industries with highly unsophisticated sellers and many neglected businesses.” Daniel Palacios at 23&Park felt this way about Colombia, “we believed we could generate much more attractive risk-adjusted returns given lesser competition and the current macroeconomic and political situation, which makes my country a buyer’s market with much more reasonable valuations/entry multiples.” On the other hand, a searcher from France observed, “Target companies tend to be smaller and the ecosystem (investors, lawyers, brokers, bank finance) are not as developed for searchers and there are tax advantages for investment funds to invest in SMEs, so the space is crowded, even for small companies.”
Unlike the US, where a nationwide search requires a lot of expensive travel, many countries are small enough that all prospective sellers may be reached by car or train within a half day. However, a country may not “support” very many searchers at one time due to its size. John Bournigal in the Dominican Republic points out “this is a numbers game. Without a high number of deals, your runway gets a lot shorter. Set your search length at 3-years and utilize some consulting on the side to stretch the search.”
Locating prospective sellers can be easier outside the US. Nico Gaisman, in the UK, found that “private company accounts are publicly available through a government register. Full P&L, balance sheet and cash flow statement are available, along with relatively detailed notes that break out indebtedness, directors’ salaries and so on. This enabled us to build a proprietary search function that was guided by audited financials, so we didn’t have to waste time contacting companies that wouldn’t meet our size, growth or margin requirements.” This was echoed by Helena Divišová at Generation Transfer in the Czech Republic “All Czech companies are required to publish their financials in the national registry online. The registry also has birthdays of owners and any ownership changes. That means that we do a lot more vetting before reaching out to companies and only reach out to those that fit our initial criteria.”
Daniel Palacios at 23&Park in Colombia, Juan de Dios Aguilar at Padua Capital in Guatemala, John Bournigal in the Dominican Republic and Helena Divišová at Generation Transfer in the Czech Republic all were the first to successfully search in their respective countries. They all felt that while the concept required more explanation up front, sellers, bankers and investors were curious and willing to listen without pre-conceived notions about search. Obviously, this only works once for each country, but highlights the relative advantage of a lower density of searchers in some “markets”.
Ironically, sellers may be more pre-disposed to a conversation as Bernardo Garza from Arroyo Capital found in Mexico, “Business owners are not used to being approached by searchers so they feel flattered when you write to them (and are thus much more willing to speak with you). For this same reason, a searcher needs to better filter prospects before a seller call to avoid having just an informational conversation.” Nakrin Narula at Springtide Equity Partners in Thailand found that “The competitiveness of the opportunities we see are much lower. The pricing of the deals did not differ vs. the U.S. though (3-5x EBITDA is the norm here). In fact, most business owners valued their businesses primarily based on book-value (net assets) as opposed to EBITDA multiple; making certain types of asset-light businesses very attractive.” Inigo Martinez Gil at Actera in Mexico cautioned, “Business is very relationship-driven. Owners will rely more on their gut feeling about you after a three-hour lunch and a couple on tequilas than on a bullet-proof NDA!”
Raising funds for search and acquisition
As one searcher found, “For the local investors it was even harder and longer since we had to start from the basics, introducing them to what a Search Fund was and attempt to change their mindset of why they should finance two young partners during the search phase instead of just deciding to invest once a deal was under exclusivity.” Ben Shamash at Klaro Partners in the UK comments, “culturally it takes some more convincing of UK investors to invest in a 20 something year old with limited experience than for an owner to sell to a 20 something year old with limited experience.” Björn von Siemens at S-CAPE pointed out, “Germans don’t like to pay for options to invest, it was challenging to find investors who would.”
Juan de Dios Aguilar in Guatemala found that “For a funded search, you have to think a lot about who you pick as your investor group. Be picky, make sure that the majority of your investors have plenty of experience investing and/or running companies in the region you plan to search.” Paulo Landim at Colibri found “Alumni from my business school that owned businesses in Brazil were investors who understood the opportunity and the risks. About 2 out of 3 followed through with the acquisition.” In Asia, as Nakrin Narula says, “The lack of infrastructure in sourcing also means that your personal networks become even more important in helping you source and fund-raise”.
Banks are often not used to seeing the search model as Zach Belzberg pointed out, “I had to get a little more creative convincing lenders to fund a first time operator. Also Canadian banks are somewhat of an oligopoly so it is tough to get them to compete on rates and terms.”
Contrasts to searching in the USA
Much which is written or published on search is focused on searching in the USA, even though many of the lessons and best practices around why to search, when, with whom and how to fund seem to have very little differences outside of the USA. Searchers were asked to explain their perceptions of the differences. Geography was at the top of the list, as one searcher observed, “The middle-of-nowhere in the UK much more accessible than middle of nowhere in the USA!”
John Bournigal was surprised to suffer poor results from business brokers and intermediaries, “They were marketing old and bad deals that weren’t worthwhile targets. Moreover, I realized I was about 100th on their list of buyers when something actually good came along. They were very accustomed to sending the deals to the big 10 HNI(High Net Worth Individuals) that were likely to buy and did not want to deal with anyone else. They did not view me as a qualified buyer. Creating a proprietary deal pipeline is the only shot you have. If you wait for brokers to bring you deals, you are dead.” Another searcher pointed out that because of the geographical constraints, “You may have to open up some of the other parameters of your search like customer concentration or recurring revenue.”
Access to debt capital varies widely across countries. Daniel Palacios and 23&Park in Colombia found that “Even with the smaller size of the market and somewhat less competition for good deals, there is much less access to cheap debt which requires much higher equity contribution from investors, and there are no SBA backed loans!” However, another searcher found “Personal guarantees in the USA always scared me, and are not required in the UK.” Charles MacBain at Next Gen Growth Capital, searching in Europe, relates another difference, “Seniority is more important in Europe than in the US. A young searcher in Europe will have more difficulty establishing credibility.”
Finding both local and traditional investors is generally felt to be much easier in the USA than for International searchers. In the UK however, Max Silver from Euston Capital felt “once you have a deal under LOI, it is just as easy for use to find equity compared to our US counterparts.”
Advice from international searchers
Having been down this path already, International searchers were eager to share advice with those who follow in their footsteps. Many noted their concern about “saturation” in their own countries and had a number of other observations including, “talk to recent searchers in neighboring countries, not just your own.”
Lionel Peralta from Costa Rico recommends, “For Emerging Markets, have some big-name investors that will give you the credibility with sellers.” Similarly, learning about search first hand was emphasized Daniel Palacios at 23&Park in Columbia, “I had done an internship over a summer with a searcher and thanks to their early commitment and investor introductions, we were able to raise out fund. My grad school alumni network definitely helped.”
One searcher struggled to find a partner to search with, saying “I wanted to search with a partner, but my partner found it hard to move here. Locally, it was impossible to find someone with complimentary skill-set/background. Also, it pays if the searcher comes from a well-known family in the business community.” Another says to focus on the business climate, “Don’t be put off, as long as there is a good regulatory / legal regime in place in that country to support you.” Charles MacBain and Next Gen Growth Capital says, “Email outreach is useful but sellers respond better to letters in Europe.”
Paulo Landim at Colibri in Brazil and Juan de Dios Aguilar in Guatemala both structured their investment documents saying “Find investors inside your own country, don’t accept currency risk if you can avoid it.” Helena Divišová at Generation Transfer in the Czech Republic advises, “Don’t assume that just because it works elsewhere, it will work in your country. Do analytical research upfront. I spent about two months analyzing the opportunity – competition, size of the market, financing environment, etc. before committing to the search. It allowed me to make more informed decision and also gave me ammunition for explaining myself to other market players.”
Why International searchers decide not to search
Despite the opportunities that successful searchers see, others are hesitant to take this path for a variety of reasons. A few reported that their countries did not have conducive climate for entrepreneurial businesses as with the UK’s “Entrepreneurs Relief” tax breaks for sellers with cash on their balance sheets. One searcher shut down his search in France after discovering a very difficult environment for searcher/operators. Varun Gupta now Founder & CEO of MeTripping found that, “An ecosystem is missing in India to make all the pieces come together for funding support – both at the search phase and for the deal.”
John Bournigal, in the Dominican Republic says “I wasn’t sure that potential sellers would take me seriously, that their books did not reflect the truth and that advisors didn’t really know how to run a due diligence process. After getting into the search process, I can say that most of these actually materialized!” Inigo Martinez Gil observed, “There is less acceptance of “failure” in our culture: a failed project (be it a startup, search fund, etc.) is seen as a learning experience by potential employees/investors in the US. In Mexico it is seen as a failure and blamed on the entrepreneur more personally, potentially limiting career options if unsuccessful.”
Bernardo Garza shares his concern about his search in Mexico that others are facing in Brazil, Canada, UK and perhaps Spain, “The most important concern among Mexican searchers is saturation. Too many search funds have launched in the last two years and there are still many out there that have not closed. Investor funds are drying up for Mexico”. On the other hand, Ben Shamash, in the UK predicts “Outside of the USA the UK is probably the most aligned culturally to the US. We tend to lag behind US trends by 5 to 10 years so we will definitely catch up – as more people learn about the model, the more will try it, the more publicity on the back of successful exits, the more people will try it. Just do it!”
The “rule of law”, corruption and accounting practices may mitigate against search success. One searcher points out that “real EBITDA can be substantially different than reported EBITDA. It is important not to overlook companies before really understanding how they report earnings and how much personal expenses they burden the company with.” In India there may be as many as three sets of books to sort through before finding the real cash flow from the business.
Just as all searchers are different and each deal is unique, so too is each country. Consequently, it is important to make your decisions based on a deep understanding of the issues you will face in a specific region, by investigating deeply the characteristics surrounding investors, sellers, debt availability, transparency of information, and regulatory climate for searchers. Where the conditions are ripe, many successful international searchers have made the leap to own and operate their own growing firms.
Feel free to share some of your own best practices or experiences in dealing with these issues in the blog comments. I encourage comments and dialog, allowing all to learn from both my views and the views of others – a virtuous learning cycle. Jump right in! I frequently update individual blog posts, add to the Reference section and Search tips, so visit the www.jimsteinsharpe.com website regularly.