Tracking the Search Fund Mafia

They are not coast- tocoast yet but search funds — a way for entrepreneurs to raise seed capital from a group of backers and then seek out a target — now stretch to Calgary in the west from Montreal in the east.

Recently formed Legado Capital has the distinction of being the first such entity in Western Canada. Based in Calgary, the search fund is the brainchild of Jeff Blacklock and Carlos Meza and is backed by a group of U.S and Canadian investors.

The investors have given the two founders — who met while each was doing their MBA at the University of Calgary — enough cash to allow them to search for an acquisition, to do the required due diligence, to make the purchase and fund it with additional capital from the original backers — and then to run the business.

That plan, whereby the new team will manage, and grow, the business explains the company’s name: Legado, a Spanish word, means legacy in English.

Blacklock and Meza — both of whom are engineers — became converts to the search fund model after they tried to buy a private company on their own. The two, after realizing that buying a business was more difficult and more expensive than they’d imagined, visited Stanford University — the institution that developed the model almost 50 years back.

The i dea was to meet the so- called Search Fund Mafia, a group of investors who have backed numerous search funds. Armed with that knowledge, new contacts, one of which is the entrepreneur-in-residence at the Harvard Business School, and with capital from half a dozen investors, the pair then rounded up half a dozen Canadian investors.

Blacklock said the search fund model appeals “because we have a group of active investors. Not only do we have people backing us up with cash, they are also backing us up with their experience and knowledge.”

In addition, the model furnishes the two with resources to seek out potential targets. “This model provides funding to do that,” said Blacklock, adding it “allows younger entrepreneurs, who have a lot of energy and brains to execute on a business. It’s really tough to buy a business if you don’t have a structure behind you to get it done.”

Last fall and back in Canada the two tweaked the model: they recruited a group of students from the University of Calgary to help seek out potential targets by doing “proprietary outreach.”

The students, a mix of undergrads and MBAs, represent the third leg of the search process and are meant to complement the other two: leads that come from their own contacts and those that are provided by agents, the merry band of accountants and lawyers.

Legado has focused on targets in health care; testing, inspection and certification; and technological services. Potential targets are companies that have an enterprise value between $ 10 million and $30 million, that generate EBITDA in the $2 million — $6 million range, that have three years of stable cash flow and that are scalable, a feature that allows the business to grow.

Ideally the owner of the target business is either seeking to retire or to reduce their involvement in the business. “We are operating in the area that’s too big for most individuals but too small for either private equity investors or capital pool companies,” said Blacklock.

So far the search process has seen one letter of intent signed but rejected. Currently there are discussions with three parties to determine whether there is a good fit.