IS A SPAC OR SEARCH FUND IN YOUR COMPANY’S FUTURE?

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If your Outsourced Business Services (OBS) company hasn’t received an inquiry from a Search Fund or SPAC lately, it is understandable if you are feeling left out.

What is a search fund?

Typically, a search fund is composed of recent business school graduates who wish to skip the career track and immediately assume an owner-operator role. Rather than doing so organically with a start-up, they are entering the market and picking different industries with growth potential. One of the sectors these recent business school graduates have been contacting are owners/executives of OBS companies.

Search funds typically target companies valued from $5 million – $50 million, requiring $2 million to $10 million of equity capital. Targeted companies typically exist in fragmented industries, with sustainable market positions, histories of stable cash flows, and long-term opportunities for improvement and growth through an infusion of new management and/or technology. Service and light manufacturing companies are popular targets. This sounds like the perfect description of the OBS sector.

 The one downside is many search funds do not have committed capital behind them. Still, I wouldn’t eliminate them from your buyer prospect list as they offer an interesting solution for family-owned or retiring shareholders who need to bring in new “blood” with a fresh outlook and youthful energy into the business. 

What is a Special Purpose Acquisition Company (SPAC)?

Although SPACs have been around for a while, they appear to be multiplying as quickly as mushrooms following a spring rain. Former baseball player Alex Rodriguez has a SPAC, as do former football player Colin Kaepernick, former basketball player Shaquille O’Neal and former House of Representatives Speaker Paul Ryan. In 2019, 59 SPAC IPOs raised $13.6 billion. In 2020, nearly 250 SPACs raised more than $83 billion.

< https://www.spacresearch.com > In only the first month of 2021, 75 SPACs were launched. < https://www.morningstar.com/articles/1019198/spacs-party-like-its-2020>

How does a SPAC work?

A SPAC raises capital through an initial public offering (IPO) for the purpose of acquiring an existing operating company. The operating company merges with, or is acquired by, the publicly traded SPAC to become a NASDAQ or NYSE listed company in lieu of executing its own IPO. Sports betting website DraftKings is one company recently acquired by a SPAC. It has been reported two of Asia’s leading digital firms, Gojek and Tokopedia, are considering listing in New York via a SPAC.

The individual(s) putting up the initial capital stake of up to 5% – 6%, who is/are identified as the “ sponsor” or “management team,” is/are allocated a 20 percent stake in the SPAC. Other investors receive an equity interest according to their capital contribution.

The only requirement is that the SPAC identifies a target company and purchases it, usually within two years. If a purchase is not made during the agreed upon time period, the SPAC must dissolve and return the funds to the shareholders. In practice, though, SPAC sponsors will often extend the life of the SPAC by making a contribution to the trust account to encourage shareholders to approve a charter amendment delaying the liquidation date.

SPACs are sometimes known as “blank check” companies because investors give the investment vehicle a blank check to purchase a business, sight unseen.

How are search funds different from SPACs?

One way search funds are different from SPACs is the equity capital raised by a search fund is private versus publicly traded in a SPAC. Plus, since the SPAC raises funds via an IPO, the underwriting investment bank will receive a commission of the gross proceeds. This reduces the amount available to invest in the acquired or merged company.

What does this mean to owners of OBS companies?

During the months and years ahead, owners of legacy OBS companies will be called upon to invest increasing amounts of money into their businesses as they respond to technological advances. Of course, this is already happening.

Competitors who make these investments will challenge owners who choose to not make them and instead elect to retain out-of-date legacy technology. This will place the latter group in a competitive disadvantage, potentially diminishing the value of a business built up through years of hard work.

In addition, as in many businesses, the OBS sector is being concentrated as former competitors combine their operations for increased structural efficiencies. This also leaves independent operators at a competitive disadvantage.

What’s more, technology add-ons resulting from the COVID 19 pandemic and the Work From Home (WFH) movement are only adding to the new technology- shopping list confronting owners of legacy OBS businesses.

This is happening when many legacy owners would prefer to dial back their business activities, and enjoy their success.

Is a SPAC or search fund right for you?

Owners who would prefer to monetize their OBS companies, and take a well-earned victory lap, should add SPACs and search funds to their list of potential exit strategies. In addition, based on their deep knowledge of the OBS sector, they can consider tapping into the opportunities available from sponsoring a SPAC and assembling a group of investors.

Work with a trusted professional.

As in all things, SPACs and search funds do not come without risk. In addition to educating yourself on their pluses and minuses, you should engage the assistance of a credentialed, well-respected Mergers & Acquisition (M&A) specialist to guide you through the process. Engage this professional at the earliest stage of the process, to take full advantage of his or her expertise.

Your life’s work deserves no less.

 

 

 

As a Managing Partner at Corporate Advisory Solutions (CAS), headquartered in Philadelphia, Michael Lamm oversees and executes on M&A engagements, investment opportunities, compliance/regulatory assessments, valuation and expert witness litigation matters for constituents of the Outsourced Business Services (OBS) sector. Michael can be reached at mlamm@corpadvisorysolutions.com or 202-904-7192.

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