Search Fund

A search fund is an investment vehicle where an entrepreneur (called a "searcher") raises capital from investors to systematically search for, acquire, and operate a single small-to-medium-sized business. Unlike traditional private equity, search funds focus on acquiring one specific company where the entrepreneur will serve as CEO.

How Search Funds Work

The process unfolds in two distinct capital-raising phases, each with specific risk-return profiles:

Phase 1: Search Capital ($400K-$600K)

Searcher raises initial capital for 18-24 months of systematic business acquisition search
Investors receive 6-8% equity per $25,000 invested during search phase
Funds cover searcher salary ($150K-$200K annually), deal sourcing, due diligence, and legal expenses
Risk consideration: 15-20% of search funds fail to find a suitable acquisition target, resulting in total loss

Phase 2: Acquisition Capital ($3M-$15M)

Upon target identification, searcher raises acquisition financing at predetermined valuation methodology
Search investors receive pro-rata rights and often 15-25% discounts to market pricing
Searcher typically receives 6-8% equity at closing, with additional 5-10% earned through performance milestones
Financing structure example: $8M enterprise value = $2M down payment + $4M SBA loan + $2M seller financing

Performance Data and Benchmarks

Stanford Graduate School of Business research (30+ year dataset, 500+ funds) reveals:

69% success rate (profitable exits) vs. 10% for angel investments and 25% for venture capital
Median cash-on-cash returns: 3.2x over 5-7 year holding periods
Top quartile returns: 8-15x for exceptional performers
Average annual IRR: 30% (successful deals), median IRR: 18% (all deals)
Searcher compensation: $1.8M average over investment period (salary + equity appreciation)

Comparative analysis: Search funds deliver institutional-quality returns with lower volatility than venture capital, though with concentration risk inherent to single-asset exposure.

Target Acquisition Profile

Successful search fund acquisitions typically exhibit:

Financial Characteristics:

EBITDA range: $1-3 million (sweet spot: $1.5-2.5M)
Revenue multiple: 0.8-1.2x (asset-light businesses)
EBITDA multiple: 3-6x (depending on growth profile and market conditions)
Cash conversion: >85% of EBITDA converting to free cash flow

Business Quality Indicators:

Customer concentration: No single customer >20% of revenue
Recurring revenue component: 40%+ preferred (subscriptions, contracts, repeat services)
Market position: Local/regional dominance with 15%+ market share
Growth runway: Identifiable expansion opportunities worth 25-50% revenue increase

Real-world example: Manufacturing services company, $2.1M EBITDA, 78% recurring contracts, acquired at 4.2x EBITDA multiple, achieved 2.8x returns through operational improvements and bolt-on acquisitions.

Risk Framework and Downside Scenarios

Primary risk factors (in order of impact on returns):

Execution risk (45% of failures): Searcher inability to scale operations or implement growth initiatives
Market deterioration (25%): Industry decline or competitive displacement during holding period
Customer loss (15%): Key account departure despite diversification efforts
Integration challenges (15%): Cultural misalignment or operational disruption post-acquisition

Downside protection mechanisms:

Management backup plans: Experienced operator network for searcher replacement
Board governance: Investor board seats with operational oversight
Financial covenants: DSCR minimums and cash management protocols

Search Fund vs. Self-Funded Search

Structure	Traditional Search Fund	Self-Funded Search
Searcher equity at close	6-8%	80-100%
Capital at risk	Investor capital	Personal wealth
Acquisition timeline	18-24 months	Indefinite
Deal size capability	$3-15M enterprise value	Limited to personal financing capacity
Success probability	69% (institutional backing)	~45% (resource constraints)

Investment Terms and Economics

Traditional institutional search funds:

Search phase minimum: $25,000 (6-8% equity allocation)
Acquisition phase minimum: $100,000-$500,000
Management fees: 2% annually on committed capital
Carried interest: 20-30% above preferred return threshold

Co-investment platforms (e.g., Search Fund Ventures):

Minimum investment: $10,000
Fee structure: 1.5% management fee, 20% carried interest
Liquidity terms: 5-7 year expected hold, no early redemption rights

Key Takeaway for Investors

Search funds offer compelling risk-adjusted returns through a proven acquisition methodology, but require tolerance for single-asset concentration and 5-7 year illiquidity. The asset class particularly appeals to investors seeking diversification from public markets and venture capital while maintaining institutional-quality return potential. Success heavily depends on searcher quality assessment and due diligence on acquisition targets. Given the operational nature of value creation, search funds complement rather than compete with traditional financial asset allocations.

Portfolio allocation consideration: Most sophisticated investors limit search fund exposure to 5-10% of alternative investment allocation, treating it as a specialized private equity subset rather than a core holding.

The search fund model was pioneered at Stanford Graduate School of Business in the 1980s and has since expanded globally, with over 500 search funds launched worldwide.