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Understanding Search Funds and Entrepreneurial Acquisitions

Having been popular in the US for decades, search funds and entrepreneurial acquisitions are a steadily growing concept in the UK and Europe. One of the reasons for their growth is that millions of business owners are reaching retirement age with no successor.

In contrast to traditional entrepreneurship, where the entrepreneur comes up with an idea and then grows it into a company, the idea of entrepreneurship through acquisition is embedded in the acquired company. In this introduction to search funds and entrepreneurial acquisitions, I explain the process and set out the pros and cons.

What Is A Search Fund?

Search funds are investment vehicles through which aspiring entrepreneurs, known as “searchers,” raise capital from investors with the primary objective of identifying, acquiring, and managing an existing business.

Searchers are typically (but not always) young and ambitious professionals with limited entrepreneurial experience. They leverage the expertise of the investors. Investors provide the necessary capital, mentorship, and industry knowledge to aid in the search, acquisition, and successful operation of a business. In return, they receive a significant equity stake in the acquired company.

What Is The Process Of Entrepreneurial Acquisitions?

Entrepreneurial acquisitions typically follow the below process:

1. Searchers begin by identifying potential acquisition targets. This involves researching industries, market trends, and specific companies that align with their interests and expertise. The goal is to find a business that has growth potential and fits their strategic vision. This can take one to two years and is funded by investors via a search fund. This fund pays for the searcher’s salary during this period as well as any associated searching costs such as initial due diligence.
2. Once a target is identified, searchers will raise acquisition funds to purchase the business. Raising acquisition funds typically involves presenting a detailed business plan, financial projections, and a clear strategy for post-acquisition. Investors evaluate these proposals and decide whether the potential ROI is sufficient to risk providing the capital needed to acquire the target.
3. After securing funding in principle, the searchers conduct extensive due diligence on the target company. This involves a comprehensive analysis of, for example, the company’s financials, operations, customer base, and competitive landscape. The goal is to assess the business’s health and identify any potential risks.
4. If due diligence is successful, the searchers negotiate the terms of the acquisition with the target company’s owners. This includes finalising the purchase price, deal structure, and any post-acquisition arrangements. Once an agreement is reached, contracts are exchanged and ultimately the acquisition is completed.
5. After acquiring the business, searchers typically take on the role of CEO. They implement their strategic vision, make operational improvements, and work towards the company’s growth and profitability. The involvement of investors as mentors and advisors can be crucial during this phase.

What Are The Benefits Of Search Funds And Entrepreneurial Acquisitions

Search funds allow aspiring entrepreneurs to enter the business world with a reduced level of personal financial risk. They can leverage the expertise and financial support of their investors to acquire an established business rather than starting from scratch.

In addition, the process of identifying, acquiring, and managing a business provides searchers with valuable hands-on experience in entrepreneurship. They gain insights into various aspects of business operations, from financial management to leadership.

Search funds also provide access to capital from experienced investors who often have a network of industry connections. This financial support, coupled with mentorship and guidance, increases the chances of a successful acquisition and business growth.

Finally, entrepreneurial acquisitions can breathe new life into existing businesses, preserving jobs, and maintaining continuity in the marketplace. This can be particularly significant in industries where succession planning is a challenge. For investors, search funds offer a unique opportunity to diversify their portfolios. Instead of traditional investments, they can back promising entrepreneurs and participate in the growth of the acquired businesses.

What Are The Advantages Of Search Funds And Entrepreneurial Acquisitions

Identifying a suitable acquisition target can be a challenging and time-consuming process. It requires in-depth research, market analysis, and a clear understanding of the searcher’s own strengths and weaknesses. In addition, raising capital for search funds can be a hurdle, especially for first-time searchers. Convincing investors to commit significant funds based on a business plan requires strong presentation and negotiation skills.

Inaccurate or incomplete due diligence can lead to costly mistakes. If searchers fail to uncover critical issues during the due diligence phase, both they and their investors can face significant monetary loss. Therefore, relying on the expertise of legal, financial, and other professional advisors (for example valuers) is paramount to mitigating the risks of acquiring a target company.

Wrapping Up

Search funds and entrepreneurial acquisitions have emerged as a viable pathway for aspiring entrepreneurs to enter the business world, leveraging the expertise and financial support of investors to acquire and revitalise existing businesses. It also provides owners of the target companies with a feasible succession plan.

Whether you are an investor, target business owner, or entrepreneur, we can assist you with all associated legal matters concerning search funds and entrepreneurial acquisitions.

To discuss any of the points raised in this article, please contact Adam Convisser or fill in the form below.

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The Benefits of Increasing use of Turnover Rents

In the ever-evolving world of commercial real estate, the content and form of leases are constantly adapting to meet the changing needs and challenges faced by both landlords and tenants. One such adaptation that has gained momentum in recent years is the increased use of turnover rents.

Turnover rent provisions which were traditionally limited to outlet centres such as Bicester Village are now appearing increasingly in general retail contexts, and, in particular, for retail and restaurant leases.

The increasing popularity of turnover rent arrangements is due to a number of factors, including the rise of online shopping and the impact of the COVID-19 pandemic which has caused a shift in consumer behaviour.

What Is Turnover Rent?

Turnover rent is an arrangement where the tenant pays usually pays a base rent along with a percentage of their gross revenue as rent to the landlord.

In traditional lease agreements, a tenant pays a fixed amount of rent, regardless of the success or failure of the tenant’s business.

However, turnover rents tie the rent amount directly to the performance of the tenant’s business. This makes for a more flexible and dynamic arrangement, with a tenant’s rent payments fluctuating in line with sales/turnover.

Benefits Of Turnover Rents For Tenants

There are a number of potential benefits to turnover rents for tenants, including:

• Reduced costs: turnover rents can help tenants to reduce their costs, particularly during times when sales are low.
• Increased flexibility: turnover rents can give tenants more flexibility, as a portion of the rent payable is directly linked to the tenant’s turnover.
• Shared risk: Turnover rents share the risk of business fluctuations between the tenant and the landlord.

Benefits Of Turnover Rents For Landlords

There are also a number of potential benefits to turnover rents for landlords, including:

• Increased income: Turnover rents can help landlords to increase their income, particularly if the tenant is successful.
• Alignment of interests: Turnover rents align the interests of the tenant and the landlord, as both parties benefit from the success of the business. Both parties are invested in the business’s success at the property; if the business of the Tenant does well, the tenant benefits from higher turnover, and the landlord benefits from higher rent receipts.
• Reduced risk of vacant properties: Turnover rents can help to reduce the risk of vacant properties, as landlords are more likely to retain tenants who are paying a rent that is linked to their turnover.

Challenges Of Turnover Rents

There are also a number of challenges associated with turnover rents, including:

• Complexity: Turnover rents are more complex to negotiate and administer than traditional leases with a fixed rental income. Some of the most challenging aspects of turnover rent leases involve the details. For example, how will online sales, click and collect, Deliveroo and UberEATS orders and showroom stores be handled? How will the tenant report store figures to the landlord? Will the tenant need to hire external auditors to prepare and submit an audited turnover certificate? It is important for both landlord and tenants to have a clear and unambiguous definition of turnover in the lease.
• Potential for disputes: There is always the potential for disputes between tenants and landlords over the calculation of turnover and the payment of rent, particularly in relation to what is included within the definition of turnover. In general, turnover refers to gross revenue, not profit. This includes all payments received at the premises, including from concessions, subtenants, and ancillary charges such as delivery and postage. The full sale value of items sold at a discount to staff or rewarded to customers is also included. VAT, other sales taxes, and customer refunds are typically deducted from turnover.
• Cooperation: making a turnover arrangement work will a landlord and tenant to liaise with each other in relation to the submission of turnover figures throughout the term of the lease
• Impact on property values: Turnover rents can make it more difficult to value commercial properties, as the rental income is not fixed.
• Other Lease Clauses: Turnover rent provisions are often seen as separate from the rest of the lease, but they can impact other clauses, such as keep open obligations, landlord termination rights, and reversions to a fixed rent if the lease is transferred to a new tenant.

Conclusion

Overall, turnover rents can be a beneficial option for both tenants and landlords. However, it is vital to be aware of the challenges involved before entering into a turnover rent lease and ensure that the turnover rent provisions within a lease are considered very carefully.

To discuss any of the points raised in this article, please contact  Mark Cornelius or fill in the form below.

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Is AI Generated Content Protected By Copyright Law?

At the time of writing, 100 million people around the world have used ChatGPT and more than  15 billion images  have been created using text-to-image algorithms since last year.

Worryingly, 68% of employees have not informed their boss that they are using artificial intelligence generated content (AIGC) when undertaking certain tasks such as writing emails and marketing/sales content, scheduling meetings, creating images, and analysing data.

The reason lack of employer oversight is concerning is that the law surrounding AIGC is, to put it generously, unfit for purpose, especially regarding intellectual property (IP). This article, part one in a two– part series, will provide a snapshot of the latest information around the issue of whether AIGC can be protected under copyright law.

Copyright Law In England and Wales

Copyright law is governed by the Copyright, Designs and Patents Act (CDPA) 1988. Copyright seeks to protect the form of creative ideas, not the ideas themselves (these can be protected via confidentiality). Copyright provides a vehicle for the authors of original work to protect their creativity and stop others from using it without permission for their own advantage.

The following categories of works are protected under UK copyright law:

• Original literary, dramatic, musical, or artistic works which, in the case of literary, dramatic, or musical works are recorded in some way.
• Sound recordings, films, or broadcasts.
• The typographical arrangements of published editions.

Copyright Protection For Primary And Secondary Works

Both primary and secondary works are protected under the CDPA 1988, though primary works receive stronger protection because they require more significant amounts of creativity and originality.

In the case of literary, dramatic, musical, or artistic works, the author or creator of the work is usually the first owner of any associated copyright. The exception to this is if any of the aforementioned works are created by an employee in their course of their employment. In this case, the employer is the copyright owner unless there is an agreement to the contrary. Where there are two or more authors who have created a work, they may have joint ownership of the copyright if their contributions are indivisible or co-authorship where separate contributions can be identified.

Under the CDPA 1988 computer-generated works are defined as “generated by computer in circumstances such that there is no human author of the work”. Therefore, the law suggests content generated by an artificial intelligence (AI) can be protected by copyright (more on this below).

Who Owns The Copyright of AIGC?

Let us imagine that one of your employee logs onto ChatGPT and inputs the following:

“1000 words on why triple glazing is better than double glazing”

ChatGPT provides the employee with a 1000-word output. They lightly edit the piece, for example, by adding a call to action, and then publish it on the organisation’s website as a blog.

Who owns the copyright? There are five possibilities:

• The employee
• The employer
• Open AI (the owner and creator of ChatGPT)
• ChatGPT itself
• The original authors of the content used to train ChatGPT

We can discount possibility one under the CDPA 1988 as the AIGC was made in the course of employment. Possibility four can also be dismissed because the CDPA 1988 does not recognise a non-human as the author or owner of a work. And given the Government’s response to the 2021 AI consultation, this stance is unlikely to change in the near future. Possibility three cannot apply because under Open AI’s terms and conditions, “Subject to your compliance with these Terms, OpenAI hereby assigns to you all its right, title and interest in and to Output.”

This leaves possibility two and five. The latter is currently being fought out in various lawsuits across both sides of the Atlantic.

Therefore, we are left with possibility two – the employer. The next challenge is to establish whether the AI created article can fulfil the CDPA 1988 requirements of originality, authorship, ownership, and duration of the copyright.

Challenges To Copyright Ownership In AI-Generated Content (AIGC)

It is arguable that the current level of sophistication of AICG does not allow for originality. Everything ‘created’ by AICG is already in existence. The developers simply scraped pre-existing content from the internet (without permission, hence the lawsuits) and trained their models on the enormous streams of pre-existing data. The employee cannot be the true ‘author’ of the article (thereby allowing them to pass on ownership to their employer) because they did not create it. We have already established that ChatGPT cannot be the author/owner of the work, and Open AI has assigned its rights to the person who inputs the request into ChatGPT. The issue of duration of the copyright also creates problems as in many cases, the length of the copyright protection is attached to the lifespan of the author. And as you may have guessed, machines cannot die.

The answer to the question – who owns the copyright of an AICG work is, under current copyright law…no one, because the current legislation does not cover AICG. The above paragraph is confusing and contradictory because that is the current state of the law.

At present, AIGC lacks protection under the provisions of the CDPA 1988. Interestingly, United States District Court Judge Beryl A. Howell recently ruled that AI generated artwork cannot be copyrighted under current US law. In her decision, Judge Howell wrote that copyright has never been granted to work that was “absent any guiding human hand,” adding that “human authorship is a bedrock requirement of copyright.”

Wrapping up

Although AIGC does not benefit from copyright protection under the current CDPA 1988, this does not mean that the law cannot be amended to change the status quo. The Act is already contradictory, given that “the legal concept of originality is defined with reference to human authors and characteristics like personality, judgment, and skill” but originality can be applied to computer-generated work.

By amending the Act to extend authorship to non-human authors, not only could end-consumers rely on some form of IP protection, but it would also encourage investment in AI technology because innovators would be able to rely on IP law to protect their creative efforts.

In part two of this series on AIGC and copyright we will examine the risks of copyright infringement, both when training AI models and using the outputs of AI tools.

To discuss any of the points raised in this article, please contact Marcus Rebuck or fill in the form below.

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