1. Describe the search Mechanics.

Nashton Partners helps to raise fund to finance the search process for the HBS graduates to discover companies that they can run and operate in the next five or 10 years. The identified companies are expected to have predictable recurring revenues and do not require a huge amount of capital to grow and develop. The cash flow is also maintained and improved when the business grows. According to the case study, the funds will be used to finance the search process for a target company to purchase and to finance the due diligence, a comprehensive appraisal of a business undertaken by a prospective buyer, especially to establish its assets and liabilities and assess the business potential.

2. How did Davis and Pananos fund their search?

Nashton Partners raised $500,000. Each search fund unit is about $25,000. The initial $25,000 would roll into the equity of the purchased company at an evaluation of $37, 500. The search process will also give investors an option to invest capital in the business deal. Let say, if the target company requires an equity of $5 million, an search fund investor would be given an option of investing $250,000 in the purchase. The book value is decided to be $287,500 if an search fund investor decides to participate. If the investor does not participate, he or she will still have an equity interest of $375,000. The board is comprised of two operators and three investors.

3. How do search funds pay for search costs?

Davis and Pananos, the two HBS graduates will be received an $80,000 annual salary during the search process, even though it is much lower as compared with starting with an entrepreneurship. Besides, Davis and Pananos will also have an ownership interest. They would share up to 30% carried interest after investors received their invested capital.

4. How do search funds raised capital for the deal.

Basically, search funds are raised through creating an special-purpose acquisition company or so-called SPAC. It is a company that is initially listed with no operations but formed exclusively to make acquisition using the cash raised from IPO or investors. By putting money in a SPAC, investors can also benefit because credible management of the target company can enhance shareholder’s value.

5. Did the founders do anything wrong in their search process? Would it provide sufficient deal flow?

So far, the founders have not done anything wrong in their search process. In the search process, there are generally two available options. One is the Statesman Energy opportunity. The other is the vector disease control, Inc., or VDCI. Davis and Pananos discover that it is rather difficult to establish a business relationship with the seller of the Statesman Energy. The sellers also do not wish to have any compromises at all. Investors thereafter are reluctant to invest additional round of funding for the company.

Moreover, it may not provide sufficient deal flow after the search process. Deal flow is a term that is often used by investors to describe the rate which they will receive from business proposals or investments. It seems that VDCI can potentially provide sufficient deal flow. However, Davis and Pananos appear to have very limited knowledge with respect to pest-control. In addition, if Nashton partners decide to acquire VDCI, it seems that both of Davis and Pananos are not able to work in Arkansas, the headquarter of the company. Investors may be worried about the conflicts of interests between Davis and Pananos and the the investors.