When to Search?
Deciding when to start your search is one of the more significant decisions in your entrepreneurial life; be sure you get it right, as you may likely get only one chance. Search is not for everyone, but if you think it is for you, then “now” may not always be the right time to start.
There are multiple considerations around the issues of timing including family obligations, career situation, personal finances, professional skill set and other responsibilities on your plate at the moment.
It is primarily about you!
Fundamentally, the answer to “when to start” is when you “feel ready” to be successful running a business as the CEO. In my own case, despite having relevant operating experience early in my career, I just did not feel confident to run a business of my own until 10 years after earning my MBA. I am a “practicing” kind of person and prefer repetitive experiences before I feel competent.
The role of experience
The GSB Stanford Studies study shows that the number of years beyond receiving your MBA has little impact on the outcome of the search process or the acquisition. It implies that the MBA skill set is sufficient for success. With newly acquired competencies, you may feel ready to launch the search process, which is a lot different than feeling ready to operate a company you find. Moreover, there are many successful searchers without business degrees who have compensated for it with many years of business experience before they acquired a business and became CEO.
Many successful searchers start without such operational experience, their learning curve is steep, and the risks are higher. Waiting until you have sufficient competence, confidence and experience may help you be an even better CEO. Work experience that is not directly related to the business you purchase, operational activities like sales, operations, and product/program/people management are critical skills for running the business, but can be developed quickly with practice once you have a business to run.
Given this, how does it feel to you? Do you feel the need for additional experience to reduce the risk of failure? Or have you had some experiences to show yourself that you can learn quickly, be nimble and deal the inevitable surprises that come with business ownership?
Delaying too long has a unique set of perils. Life gets in the way! Family obligations increase, lifestyle expectations rise, car and house payments start to go up. Searchers may have to decide to restrict their prospecting to a tight geographic range to match their partner’s career track or to reduce the impact on their young family.
An “out of work” situation mid-career often is a great time to consider a search. Perhaps you are in better shape financially, with savings in a “rainy day fund” and a strong credit history. Operating skills have been developed, tested and refined. (See Blog post on Mid-Career searching)
The ability to raise financing is enhanced because you are a “known entity”. Moreover, you have built a stronger professional network that can be supportive throughout the process. Sellers will feel more confident in your ability to take over their legacy.
On searcher in New York City remarked, “I benefited from waiting 4 years to do a search and I think my post MBA learnings maximized my chances of success. The difference in waiting a few years to do this seems trivial when you realize how long a path it is from start to closing a deal.”
Later in Career
As family obligations become less significant and operational skills have been developed and honed, launching a search toward the end of a career can be a way to achieve the independence and autonomy from a large organization and devote energy to having an impact on an established business. Financially, you can support both the search phase being self-funded and invest more personal funds to secure an equity control situation.
Some older searchers are more risk averse because they “know too much” about potential landmines and pitfalls, which results in a low offer rates and longer prospecting times. From them I frequently hear that “there is just not much out there that looks good to me”! They may be right, but it certainly is colored by their prior scars and bruises from their own career. Sometimes, not knowing is better than knowing what could lie ahead.
Perhaps having too much funds to invest can be seductive, especially during tough times where the bank is looking for more collateral protection or you are waiting out a recessionary slump. One searcher I know lost all their family savings funding the business as it slowly went into bankruptcy.
Myth of the part-time search
Many searchers try to work full time or do consulting on the side while searching – a big mistake! Search takes 150% of your energy and more significantly, a seller can ”smell” your level of commitment. You have to be “all in” for this to have a positive outcome. Having a fall back often makes it too easy to wait for “exactly the right opportunity” to come along – which might never happen! Search is a full time endeavor, especially given the necessary size of the prospecting funnel. With thousands of prospective sellers, generating high numbers at the top of your “funnel” will be critical and this cannot be done as a “side project”.
If your search process yields no acquisitions within 24 months, it may be time to move on. Fortunately, your search “exit” will not get in the way of your future marketability. You will have lost time and income, but gained a great deal of relevant experience in the process. Many ex-searchers have gone on to contribute significantly in a later stage start-ups in operational roles in one of the industries they drilled down into. One went on to lead the M&A area of a Family Office, utilizing the skills developed in the prior two years. (See Blog Post – Life after winding down a search).
Financial considerations to search timing
Accumulated savings allows self-funding of your search while retaining as much as 100% of equity. Self-funding also allows for more freedom in geography, industry and deal/debt structure. Self-funded searches may yield smaller sized transactions at the outset, but over a 10-20 year period, early starting size becomes less relevant.
In a self-funded search you are often expected to sign personally on any debt financing, which may involve a serious conversation with your significant other about the impact this action may have on your lifestyle, on your financial health, and your relationship.
A funded search, where investors pay your salary for as long as two years while searching, generally appeals to recently graduated MBA’s with high debt levels and the desire to have an aligned set of advisors/investors. 80% of funded searchers are recent MBA grads.
However, funded search often carries an equity penalty, leaving the searcher typically with 15-25% of the final equity in the business. Is the advice and mentoring you get worth the equity that you will be foregoing? Will you feel less motivation running someone else’s business?
Surveying searchers five years after graduation finds almost twice as many starting their search after they have worked for a while, rather than taking the “plunge” immediately.
Search is not the path to quick riches, but does allow you to be in charge of your own destiny. Take your step onto this path with a good understanding of yourself and motives. It takes courage to start down this path. Selecting the right time to start is worth significant thought. Now may or may not be the perfect time; just be sure you have considered your options carefully, and commit fully when you determine your ‘most perfect’ time.
Feel free to share some of your own best practices or experiences in dealing with these issues in writing a blog comments. I encourage this dialog, allowing all to learn from both my views and the views of others – a virtuous learning cycle. Jump right in! Also, I frequently update individual blog posts, add to the Reference section and Search tips, so visit the www.jimsteinsharpe.comwebsite regularly.
Very insightful Jim and your path adds great perspective I have not heard as much of from fellow searchers I talk to most regularly (although a couple very successful later-career searchers certainly come to mind).
The one anecdote (which may not feel all that useful to some) is that it’s important to acknowledge that no matter what point you are in your post MBA career and life (or in b school seriously considering the search route or even one of the select few that I’ve met that went to b school with a clear objective of starting a search)…the bottom line is that (similar to any major decision), you’ll always be able to find plenty of reasons to hold off even if you’ve exhaustively thought about the decision to go the SF route to an (appropriately) painstaking level.
My view is that for many of the reasons you outlined, there will always be a laundry list of reasons to wait. This back and forth thinking is of course healthy. But I think many potential searchers stand to benefit from recognizing that eventually you will have spoken to as many searchers that did decide to pursue a search, from all phases of the process, you’ve digested the studies, and you reach a point where you find yourself almost looking for some sort of magical data point that will show you the light. But such discussions and such data points that will prompt a moment of pure clarity simply don’t exist.
You have enough first-hand insight to equip you to make a calculated decision. But the risk and the fear are inherent and therefore I’d say that while it’s certainly essential to consider whether it’s in your DNA to do this, whether you feel prepared enough, and what your personal life circumstances are, don’t try to find the perfect moment or to subconsciously try to change the true nature of the search path. At some point, there comes a point where you just have to pull the trigger, own the decision, and don’t look back. This was advice from a fellow searcher that finally got me to come around and I think that as simple as it is, it’s some of the best advice I’ve gotten.
I’d also add that there’s a parallel to this line of thinking in evaluating sellers(which I keep front of mind). Top tier MBAs are masters at finding reasons to not to a deal (and finding things wrong with opportunities). So in a similar sense don’t try to find the perfect deal because those don’t exist either just like selecting a time to start.
These are advice anecdotes that resonated with me, and I think may be worth making in the context of what you’ve raised with this post.