What Do Investors Look For? The Essential Acquisition Checklist

This week, we got together with Aly Abdel Baki, Associate at Moonbase Capital , to discuss the crucial information that searchers must provide when seeking equity partners for the purchase of a company - a pivotal moment in the search fund journey.

Quick note for those who are new here: Search funds are an investment vehicle primarily used by entrepreneurs to finance the acquisition of small to medium-sized businesses. This model allows an entrepreneur, often a recent MBA graduate, to raise capital from investors to search for a company to acquire and subsequently manage. Oftentimes, this capital is supplemented with a bank loan to finance the remaining amount.

Our searchers typically spend around two years on the hunt for the right business to acquire. This journey involves exploring various options, engaging in discussions with numerous business owners, delving into financial records, and gaining a deep understanding of different industries.

Crafting an Investment Memo

Once a promising SME is identified, searchers typically reach out to their network of investors with an Investment Memo, with the aim of gathering the required equity for the acquisition.?

Whenever investors receive such a Memo, they expect to get a comprehensive picture of the proposed acquisition, from the company's financial status to its position in the market, operational challenges, and strategic opportunities.

Being well-prepared is essential to an entrepreneur differentiating herself/ himself, especially considering the high volume of funding requests that come through.

Furthermore, having the right information and all the information is key to expediting the decision-making process.

What entrepreneurs often forget to include and why it matters

There are often missing parts to the story. According to Aly, some are more forgivable than others.

"It's understandable when a market share analysis is absent due to limited accessible data. It's challenging to obtain competitor information even when you're aware of your target company's revenues and the overall market size. However, I frequently encounter pitches lacking potential exit strategies, or even sources and uses, which is a significant oversight. As an investor, it's imperative for me to see that you've thoroughly researched how to eventually exit from this company."

Side note: We wrote an article about the exit perspectives of search funds in Europe, read it here.

Courtesy of Aly, below is the comprehensive checklist of data that we recommend any entrepreneur seeking investment to prepare and present to potential investors.

Moonbase Capital Investment Memo Checklist:

1) Historical Financial Records (2017 onwards): This includes a basic review of financial records starting from 2017, with emphasis on:

• Compound Annual Growth Rate (CAGR) for revenue or EBITDA.
• Margins: Gross profit and EBITDA margins.
• Free Cash Flow (FCF) Conversion.

2) Sales Analysis:

• Breakdown of sales revenue by product group and recurrence.

3) Business Overview:

• A summary of business operations and value chain analysis (if applicable)
• Basic organizational structure
• Detailed risks and mitigation factors.

4) Industry Analysis:

• Market share analysis with a focus on market fragmentation.
• Market positioning with a value proposition chart.
• Historical growth trends in the industry.
• Comparative valuation examination.
• Sector exit opportunities.

5) Customer Base Analysis:

• Analysis of customer base fragmentation.

6) Seller Profile:

• The reason for selling the business.
• The owner's role in the business.

7) Deal Overview:

• A summary of sources and uses in the deal.

8) Financial Analysis:

• Discounted Cash Flow (DCF) or Leveraged Buyout (LBO) model.
• Breakdown of gross profit by product.
• Historical financial data starting from 2017.

9) Customer Analysis:

• Analysis of customer type and quality.

10) Competitive Analysis:

• Summary of the growth strategy and expected capital expenditure (CAPEX) requirements.
• Analysis of customer leverage and vendor leverage or a full Porters 5 Forces analysis

So, there you have it, searchers: the detailed checklist provided not only serves as a blueprint for crafting an Investor Memo but also highlights the critical areas of analysis that you, as an entrepreneur, should scrutinise when intending to acquire a company.?

Last but not least, you can go back to our first ever article on here and read about the investment philosophy that is at the basis of our Search Fund Squared fund of funds.