Search Funds: The Entrepreneur's Path to Acquisition
Search funds represent one of the most compelling yet underappreciated paths to entrepreneurship through acquisition. For aspiring business leaders and sophisticated investors alike, understanding this unique model offers access to attractive risk-adjusted returns and meaningful operational involvement.
The Search Fund Model Explained
A search fund is an investment vehicle through which a talented entrepreneur raises capital to fund a systematic search for a privately-held company to acquire and subsequently operate as CEO. The model typically unfolds in two distinct phases: the search phase and the operating phase.
During the search phase, which typically lasts 18-24 months, the searcher identifies, evaluates, and negotiates the acquisition of a target company. Investors provide capital for searcher compensation and search expenses—typically $400,000-$500,000—in exchange for step-up equity in the eventual acquisition. Once a target is identified and deal terms negotiated, the same investor group typically commits acquisition capital, though additional investors may participate.
Target Company Profile
Successful search fund acquisitions share common characteristics. Target companies typically generate $1-3 million in EBITDA, operate in stable, fragmented industries with predictable cash flows, and possess durable competitive advantages but require professional management to unlock growth potential.
Common search fund targets include business services companies, light manufacturing operations, distribution businesses, and specialized software or technology-enabled service providers. The ideal target has demonstrated profitability, limited customer concentration, and clear opportunities for organic and acquisition-driven growth under energetic, strategic leadership.
Investor Returns and Risk Profile
Search funds have delivered compelling historical returns. According to Stanford Graduate School of Business research tracking over 500 search funds since 1984, the median IRR for investors exceeds 30%, with the top quartile achieving returns above 50%. These returns stem from multiple value creation levers: operational improvements, strategic acquisitions, and multiple expansion through professionalization.
However, search fund investing carries meaningful risks. Not all searchers successfully identify and close an acquisition. Among those who do acquire companies, execution risk during the operating phase can impact returns significantly. Sophisticated investors mitigate these risks through diversified portfolios of search fund investments, rigorous searcher evaluation, and active mentorship.
The Searcher Profile
Successful searchers typically possess stellar academic credentials, relevant operational or consulting experience, demonstrated leadership capabilities, and the temperament for the ambiguity and intensity of small business ownership. Many search fund entrepreneurs are graduates of top-tier MBA programs, though an increasing number come from operational roles in industry or private equity.
Beyond credentials, effective searchers demonstrate intellectual curiosity, resilience, strategic thinking, and the ability to build relationships across diverse stakeholder groups. The search and acquisition process tests these qualities extensively, providing investors valuable information about leadership potential before committing acquisition capital.
Value Creation During the Operating Phase
Following acquisition, search fund CEOs typically implement a structured value creation playbook. Early priorities include professionalizing finance and reporting systems, implementing strategic planning processes, upgrading sales and marketing capabilities, and identifying initial operational improvements.
As the business stabilizes and grows, focus shifts to strategic initiatives: geographic expansion, new product or service offerings, strategic acquisitions of competitors or complementary businesses, and building organizational capabilities to support sustained growth. Investors provide guidance through board participation while allowing the CEO operational autonomy.
Exit Strategies and Timeline
Search fund investments typically realize returns through sale to a strategic acquirer or financial sponsor after 5-7 years of ownership. The combination of earnings growth, professionalization, and reduced owner dependency creates attractive acquisition targets for larger industry players or private equity firms.
In some cases, search fund-backed companies pursue recapitalizations to provide partial liquidity while enabling continued growth under the existing CEO. This approach allows investors to de-risk their position while maintaining upside exposure in high-performing companies.
European Search Fund Opportunities
While search funds originated in the United States, the model has gained significant traction in Europe over the past decade. European markets offer attractive characteristics for search fund activity: aging business owners, fragmented industries, and substantial pools of well-managed small businesses seeking succession solutions.
At Avertis Group, we actively support both search fund entrepreneurs and investors in navigating the European opportunity set. Our platform provides searchers with capital, strategic guidance, and operational resources while offering investors access to curated search fund opportunities with thorough due diligence and ongoing monitoring.