Nashton Partners and its Search Fund Process Custom Case Solution & Analysis

1. Evidence Brief

Financial Metrics

Search Capital: Standard search fund raises range from 350,000 to 500,000 USD to cover two years of salary and expenses.
Target Acquisition Profile: EBITDA between 1.5 million and 3 million USD. Purchase price typically 3x to 6x EBITDA.
Revenue Quality: Preference for 80 percent or higher recurring revenue models.
Capital Expenditure: Target firms must require low annual reinvestment, typically under 5 percent of revenue.
Investor Terms: Investors receive a step-up on their search capital, usually 150 percent, and pro-rata rights to the acquisition equity.

Operational Facts

Search Duration: The standard window is 24 months. Nashton Partners aimed to close within this period to avoid capital exhaustion.
The Funnel: A successful search requires contacting approximately 1,000 to 2,000 companies to yield 10 to 15 serious Letters of Intent (LOIs).
Staffing: Two principals (Davis and Pananos) working full-time. Use of interns for data entry and initial lead screening.
Geography: National search across the United States, focusing on regions with stable regulatory environments.

Stakeholder Positions

Jay Davis and Jason Pananos: Principals seeking to transition from consultants/students to operators. Their primary goal is long-term equity appreciation rather than immediate salary.
Search Fund Investors: A mix of high-net-worth individuals and institutional funds. They prioritize high-margin, predictable cash flows and a clear exit or dividend path.
Sellers: Often retiring founders or family owners. Their priorities include legacy preservation and transaction certainty over the absolute highest price.

Information Gaps

Specific Debt Terms: The case does not detail the exact interest rates or covenants available for the acquisition financing in the current market.
Post-Acquisition Integration Costs: Data on the immediate capital required to professionalize the target firm after the founders exit is missing.
Seller Discretionary Earnings (SDE) Adjustments: The exact nature of add-backs for the primary targets is not fully disclosed.

2. Strategic Analysis

Core Strategic Question

How should Nashton Partners optimize their search process to identify a high-quality, fragmented industry target before their 24-month search capital expires?

Structural Analysis

The search fund model functions as a specialized form of private equity where the manager is the primary asset. Using the Jobs-to-be-Done lens, Nashton is not just buying a business; they are providing a liquidity and succession event for founders who value the continuity of their business.

Applying Porters Five Forces to the target industries:

Bargaining Power of Buyers: Low, due to the mission-critical nature of the services (e.g., records management, disease control).
Threat of Substitutes: Low, as these are often regulatory or necessity-driven services.
Competitive Rivalry: High in fragmentation but low in professional management, creating an opportunity for operational improvements.

Strategic Options

Option 1: Industry-Focused Deep Dive

Rationale: Concentrating on 2-3 specific niches (e.g., HVAC, Water Treatment) allows for faster due diligence and higher credibility with sellers.
Trade-offs: Risk of missing better opportunities in other sectors; potential for the chosen niche to be overvalued.
Resource Requirements: High upfront research time; specialized database access.

Option 2: Opportunistic Broad Funnel

Rationale: Casting a wide net across all B2B services with high recurring revenue maximizes the probability of finding a motivated seller.
Trade-offs: Requires higher administrative effort to filter low-quality leads; risk of being spread too thin.
Resource Requirements: Heavy reliance on intern labor and automated CRM systems.

Preliminary Recommendation

Nashton Partners should pursue Option 2. In the search fund model, deal flow is the primary driver of success. By maintaining a broad funnel, the principals can compare multiple industries simultaneously, ensuring they do not overpay for a business just because they spent months researching its specific sector. The focus must remain on the financial characteristics (recurring revenue, low capex) rather than the specific product or service.

3. Implementation Roadmap

Critical Path

The implementation follows a strict 24-month timeline. The first six months are the most critical for establishing the lead generation engine.

Month 1-3: Infrastructure Setup. Deploy CRM, hire 2-4 interns for lead scraping, and finalize the investment thesis presentation for brokers.
Month 4-18: High-Volume Outreach. Execute a minimum of 300 cold contacts per month. Aim for a 5 percent conversion rate to initial phone calls.
Month 12-20: Evaluation and LOI. Move from preliminary review to Letter of Intent for at least three targets to ensure one reaches the closing stage.
Month 21-24: Closing and Transition. Finalize debt financing and begin a 90-day shadow period with the current owner.

Key Constraints

Principal Bandwidth: The two principals must avoid getting bogged down in low-probability due diligence. They must delegate lead generation entirely to interns.
Seller Psychology: Many founders in the target size range have never sold a business. The principals must act as advisors rather than aggressive acquirers to maintain trust.

Risk-Adjusted Implementation Strategy

To mitigate the risk of search capital exhaustion, the team will implement a fail-fast screening protocol. Any business that does not meet the 80 percent recurring revenue threshold or has a single customer representing more than 20 percent of sales will be discarded within 48 hours of data receipt. This preserves time for high-quality targets.

4. Executive Review and BLUF

BLUF

Nashton Partners should prioritize deal volume over industry specialization. The search fund model succeeds by identifying businesses with superior financial profiles—specifically high recurring revenue and low capital intensity—regardless of the specific sector. The primary risk is not industry-specific downturns but the exhaustion of search capital before a deal closes. Success requires a disciplined, high-volume outreach strategy and a ruthless screening process to ensure the principals focus only on high-probability closings.

Dangerous Assumption

The most consequential unchallenged premise is that recurring revenue inherently equals business stability. In the SME space, recurring revenue can be a lagging indicator of a dying business if the underlying technology or service is being disrupted. High retention rates may reflect high switching costs rather than customer satisfaction, making the business vulnerable to a more modern competitor post-acquisition.

Unaddressed Risks

Key Man Dependency: Most firms in the 1.5 million to 3 million USD EBITDA range rely heavily on the founder for sales or technical knowledge. If the founder exits too quickly, the recurring revenue may evaporate despite contracts. (Probability: High; Consequence: Severe)
Debt Market Volatility: The search fund model relies on significant leverage. A 200-basis-point shift in interest rates during the 24-month search could render a previously attractive target unfinanceable. (Probability: Moderate; Consequence: High)

Unconsidered Alternative

The team failed to consider a Programmatic Small Acquisition strategy. Instead of searching for one 10 million USD business, Nashton could acquire a 3 million USD business and use the remaining search period to bolt on two smaller competitors. This reduces the risk of a single failed closing and allows for faster equity building through multiple arbitrage.