As a tech founder, positioning your business for a successful and lucrative exit is always at the back of your mind. The 2024 Search Fund Study, conducted by Stanford Graduate School of Business (GSB), offers critical insights that can help you enhance your company’s value and achieve an optimal exit. By understanding trends and strategies from the world of search funds, you can apply these lessons to your own business and increase its attractiveness to potential buyers.
In the report, there are interesting statistics such as:
- 681 search funds studied since 1984, analyzing financial returns and key characteristics.
- 57% Acquisition rate since 2014, with increased losses among acquisitions.
- 11% of companies achieved over 10x returns
- 50%+ IRR and promising ROI growth for the 2017-2020 cohort
- 10.2% higher IRR for tech-enabled Healthcare Services compared to non-tech-enabled
In this article, we’re going to explore what those numbers mean and add relevance to the conversation. You can then use this insight about the data to learn more about how the tech industry is poised for better exits in 2024 and beyond.
Consistency in Acquisition Rates and Performance
The study reveals that since 2014, the acquisition rate for search funds has remained steady at around 57%. This indicates a robust demand for well-prepared businesses. However, an increasing percentage of acquisitions have reported losses over the past decade, underscoring the importance of solidifying your business’s fundamentals to avoid becoming part of this statistic. Significant outperformers continue to emerge, with 11% of companies achieving returns greater than 10x. Position your business to be among these top performers by focusing on growth and profitability metrics that investors value.
Cohort Performance and Industry-Specific Insights
Tech-enabled services and healthcare services have shown higher internal rates of return (IRRs) and return on investment (ROIs) than other sectors. For tech founders, this is a clear signal: enhancing the scalability, reliability, and service quality of your tech solutions can significantly increase your business’s valuation. The 2017–2020 cohort of search fund acquisitions has demonstrated a positive trajectory with an IRR of over 50%, illustrating the potential for substantial returns with the right strategies in place.
The Impact of Strategic Partnerships
The decision to partner or go solo can significantly affect your business’s outcome during an exit. While partnered searches have an IRR of 40.5%, solo searches report an IRR of 30.3%. However, solo searchers are seeing increased high returns, with five out of six searchers achieving a 10x+ ROI in the past two years being solo. As a tech founder, consider whether strategic partnerships could enhance your company’s value or if maintaining a solo path might yield higher returns based on your unique business dynamics and market positioning.
Enhancing Compensation and Equity Value
The study highlights that entrepreneurs who successfully exit their businesses report substantial equity earnings. Entrepreneurs still operating their businesses have an average equity of $6.09 million, while those who have exited average $5.7 million. To achieve these figures, focus on building a robust revenue model, maintaining strong profit margins, and scaling efficiently. This will make your business more attractive to acquirers who are looking for stable, profitable ventures.
Geographic Trends and Global Expansion
The trend of searchers acquiring businesses outside their initial search area is growing. Only 35% of acquisitions occur in the same state where the search was conducted, down from 43% in 2018. For tech founders, this means that expanding your business’s reach and establishing a presence in multiple regions can enhance its attractiveness to a broader pool of investors and acquirers. Moreover, the international expansion of search funds, particularly in Europe and the Asia-Pacific region, indicates a growing global appetite for tech businesses. Positioning your business for international growth could significantly increase its exit value.
What This Means For Your Business
The 2024 Search Fund Study provides valuable lessons for tech founders aiming to maximize their business’s value for a future exit. By focusing on industry-specific growth strategies, evaluating the benefits of strategic partnerships, and expanding geographically, you can enhance your business’s attractiveness to potential buyers.
Staying attuned to these trends and proactively positioning your company for growth will help ensure a successful and lucrative exit, positioning you among the top performers in the tech industry. It’s also essential to have a top M&A expert like Livmo on your team when you’re looking for professional advice and a larger exit.