Search Funds: a solution for business succession in Mexico
By: Alejandro Carreón Mendoza
Unlike humans, the existence of companies is not conditioned by biological factors that deteriorate over the years. Instead, what determines this existence is the impact of the management team's decisions in response to the events unfolding in the company's environment, as well as those occurring within the company itself. The latter encompasses the financial situation, innovations and competitive strategies, labor policies, expansion opportunities, market demand changes, socio-economic crises, new financing options, tax policies, and more. Most family businesses start with a founder, and it's natural that over the years, decision-making falls on this figure. Therefore, planning for business succession becomes crucial for the company's fate.
In our country, according to the National Institute of Statistics and Geography (INEGI), only 3 out of 10 family businesses survive to the second generation. This can partly be explained by the fact that 87% of all family businesses lack a clear succession plan, and only 27% of them have a formally constituted Board of Directors (KPMG). In most cases, power tends to be given to the eldest son, the male heir, or the founder's spouse. There are all kinds of scenarios, from the founder dying suddenly, power being passed to the eldest son, and his siblings embarking on a crusade to seize power, to scenarios where family hierarchy is respected within the company, but the decision-maker lacks the experience or passion to effectively fill the role. In any case, a company without a succession plan is playing Russian roulette with its fate.
A relevant scenario is when the founder wants to retire, their descendants aren't interested in taking over the family business (having their own professions or projects), they want their legacy to endure and grow while ensuring their family continues to benefit. As a solution to this, executives can consider different options, with the most prominent being selling shares to a Private Equity firm, a Strategic Buyer... or a Search Fund.
Private Equity allows the founder to obtain liquidity and partially or fully retire from the business, providing capital, experience, and resources to drive the company's growth by implementing strategic and operational changes that increase its value. However, it's crucial to assess whether the objectives and values of the family business align with those of the private equity firm to ensure the preservation of the legacy and identity of the company, as these funds often manage numerous investments simultaneously and prioritize profitability over other aspects.
The option of a "Strategic Buyer" offers the opportunity to sell the business to a competitor seeking expansion. However, it's important to evaluate whether the strategic buyer will respect the identity and culture of the company, as well as the impact on employees and the community, as in most cases, the strategy and organization of the parent company are usually implemented, and although the family may hold stakes in the business, their opinions are often no longer considered in crucial decisions.
In the case of a Search Fund, the partial or total sale of the family business to one or two entrepreneurs can bring benefits in terms of fresh managerial skills and a renewed vision to grow the business and generate value, while respecting the legacy of the founding group, as well as their experience and opinions if they maintain a stake in the company. For example, Sapiens Capital is a Search Fund that, unlike a private equity firm, aims to operate ONLY ONE company, so the entire management team's focus will be on optimizing operational processes, financial health, continuity and development of the employee base, and preserving the entrepreneurial legacy initiated by the founding family.
At Sapiens Capital, we want to discuss your legacy and that of your company. We are a Search Fund seeking opportunities to collaborate and grow together. Contact us!
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