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23 Jan. 2015 | Comments (0)

Four million privately-held businesses stand to change hands over the next two decades as baby boomers, the largest group of owners of these companies, continue to retire. For a reported 75% of these owners, an exit plan is not in place.

There’s one ownership transition few of these companies have thought about: finding a talented millennial, fresh out of business school, and putting him or her in charge. But believe it or not, this is an increasingly appealing option.

In truth, most millennials have never thought about it either. Those who aspire to run companies are more likely to found one than try to buy. But that may change, thanks to the success of ”search funds“.

First popularized amongst the Ivy League community, particularly Harvard and Stanford, search funds are propelling entrepreneurially spirited post-MBA and other young professionals into the helms of small and mid-sized private companies. Backed by institutional investors and “friends and family” capital, these young would-be managers (a.k.a searchers) conduct a one-time search to find, acquire, and then run a business. After spending months homing in on an industry and business they believe in to identify the right fit (“the search”), they make the acquisition, relocate to headquarters, and become the new owner-operator.

For sellers without an effective succession plan — perhaps they do not have a natural heir or want to avoid corporate or institutional buyout — selling to a search fund can offer the continuation of a business’s operations in a fairly uninterrupted manner. The incoming CEO steps right into the shoes of the departing one, supported by the existing management team. Searchers are also in it for the long haul — they typically remain in the company well beyond the typical five to seven year window of a private equity buyer. For investors, average returns of the search fund “asset class” have been north of 30%, mitigating early skepticism. And of course, for the searchers, the process offers a middle path between joining a large corporation and starting something from scratch.

More broadly, the search fund model seems uniquely fitted to our demographic moment. As the population ages and more and more owner-operators retire, search funds offer young professionals a chance to grow into the CEOs and corporate leaders of tomorrow.

What does this mean for the businesses these professionals acquire? Selling to a search fund doesn’t mean bowing to the whims of a millennial. Searchers come to the table equipped with mentors, either business school professors or investors from the private equity firms backing them. So businesses are getting the best of both worlds: the vigor of millennial leadership with the security and structure of mature backers.

While the companies that end up selling to search funds are typically ones characterized by strong financial profiles, loyal customer bases, and steady, consistent growth, that profile could expand. We are on the cusp of a major generational transition in leadership. One way or another, as boomers retire, more millennials will end up in charge.

 

This blog first appeared on Harvard Business Review on 12/23/2014.

View our complete listing of Career Development, Talent Management, Leadership Development and Diversity & Inclusion blogs.

  • About the Author:Allison Tepley

    Allison Tepley

    Allison Tepley is vice president of marketing at Axial, the online business development platform connecting professionals who run, advise, finance and acquire private companies.

    Full Bio | More from Allison Tepley

     

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