Most of what is written about search funds is praise, which teaches you little on the day a deal starts going wrong. In this two-part IESE note, Professor Jan Simon documents the other side and identifies five recurring causes of failure, several of which usually strike at once. Part I covers the first two.
- The seller relationship cuts both ways. The trust that closes the deal (“if I only had a son or daughter like you”) can turn into grief and ego once the seller stays on. Helpful involvement becomes overriding the new CEO, and a quiet presence at early board meetings turns hostile later. The note is clear this is not about bad sellers; it is what handing over a life’s work does to a person
- The fixes are practical: clear the seller’s desk from day one; if they stay, offer a paid 6 to 12 month advisory role so the initiative sits with the new CEO; and if they keep shares, use a one-year put/call option to unwind the stake at the acquisition price
- Leadership failure is the second cause, at both CEO and board level. Coachable CEOs can be supported through board mentorship and coaching, while boards that underperform need shareholder engagement and, where necessary, change
- Part II covers customer concentration, market disruption and government involvement
Our take: this is not a case against sellers. Across the 13 deals we have invested in at Moonbase, our best and our worst have in many ways come down to the seller. Managed well, a seller is a blessing, not a hindrance.