7 Questions to Ask Before Investing in a Search Fund

By Nick Bryant

TL;DR: Search funds — both traditional and self-funded — have delivered a 35.1% average IRR over 40 years (Stanford GSB). But those returns aren't evenly distributed. Asking these seven questions before you invest will help you separate the strong opportunities from the ones that look good on a pitch deck but fall apart under scrutiny.

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The Search Fund Opportunity — and the Catch

Search funds have quietly become one of the most compelling asset classes in private equity. The 40-year track record speaks for itself: 35.1% average IRR according to Stanford's longitudinal study. But here's the catch — that average is heavily skewed by top-quartile performers. The difference between a great search fund investment and a poor one often comes down to the questions you ask before wiring capital.

Whether you're evaluating a traditional search fund (where investors fund the search phase) or a self-funded search (where the operator bootstraps the search and raises capital at acquisition), these seven questions will sharpen your diligence. For a structural comparison of these two models, see search funds vs. traditional PE. And if you are new to SMB investing altogether, our guide to getting started with alternative investments provides important context.

1. What's the Searcher's Background?

The operator is the investment. Full stop. You're backing an individual to find, acquire, and operate a small business — often for the first time.

Look for backgrounds in management consulting, M&A advisory, operations, or industry-specific roles. MBA programs with strong ETA communities (Stanford, HBS, Booth) provide networks and training, but they're not a substitute for real operating experience. The best operators combine analytical rigor with a bias toward action.

For a deeper dive on evaluating operators, see our guide on what to look for in a search fund operator.

2. How Much Skin in the Game?

This question separates committed operators from resume-builders. In a self-funded search, the operator is investing their own capital, forgoing salary during the search, and taking real personal financial risk. That alignment is powerful.

In a traditional search, the economics are different — investors fund the search salary and expenses. But even here, the best searchers invest their own capital alongside LPs at acquisition. The benchmark: 10-25% of personal net worth at risk.

3. What's the Deal Pipeline Look Like?

A search fund is only as good as its deal flow. Ask the operator:

• How many proprietary deals have they sourced vs. broker-intermediated?
• What's their outreach volume and conversion rate?
• How many LOIs have they submitted, and what happened?
• Do they have a defined sector or geographic focus, or are they casting a wide net?

Strong operators develop thesis-driven sourcing strategies. They can articulate why they're targeting specific industries and what gives them an edge in those markets.

4. What Are the Terms?

Deal terms vary significantly between traditional and self-funded search:

• Traditional search: Investors typically receive preferred equity with a step-up at acquisition (usually 1.5x). The searcher earns carry (20-25%) above a preferred return hurdle.
• Self-funded search: The operator typically takes a 2x equity step-up, LPs receive a 10-15% preferred dividend, and there's often a put option allowing LPs to force a sale after a defined period.

In both cases, scrutinize the waterfall. Understand exactly how returns flow and at what thresholds. If the terms create misalignment — where the operator can profit while LPs lose money — walk away.

5. Is There a Quality of Earnings Report?

This is non-negotiable. A Quality of Earnings (QoE) report, prepared by an independent accounting firm, validates the target company's financial performance. It adjusts for one-time items, owner add-backs, and accounting irregularities.

Without a QoE, you're relying on the seller's representations and the operator's analysis. That's not diligence — that's faith. Every serious acquisition should have a QoE. If the operator pushes back on cost grounds, that tells you something about their seriousness and their capital partners' standards.

6. What's the Exit Plan?

Search fund acquisitions typically target a 5-7 year hold period. But "hold and hope" isn't a strategy. The operator should articulate multiple exit paths:

• Strategic sale to a larger competitor or industry consolidator
• Financial sale to a private equity fund or family office
• Recapitalization to return capital while retaining ownership
• ESOP as a tax-advantaged exit in certain scenarios

The best operators think about exit from day one. Their value creation plan should map directly to what buyers will pay a premium for — recurring revenue, management depth, customer diversification, and scalable systems.

7. What Reporting Will You Receive?

Information asymmetry is the biggest risk in SMB investing. You're a passive investor in a privately held company run by a small team. Your only visibility comes through reporting.

At minimum, demand:

• Monthly financial statements (P&L, balance sheet, cash flow)
• Quarterly narrative updates from the operator
• Annual audited or reviewed financials
• Real-time access to key metrics (revenue, EBITDA, cash balance)

If an operator is reluctant to commit to monthly reporting, consider it a serious red flag. Transparency and returns are correlated — operators who share information freely tend to perform better than those who don't.

The Complete Framework

These seven questions are distilled from the 20-question framework in our LP Due Diligence Guide. If a search fund opportunity passes this initial screen, use the full guide for comprehensive evaluation.

For more context on self-funded search specifically, see our guide on what is self-funded search investing.

Ready to systematize your diligence process? Download the complete LP Due Diligence Template.