What is a Search Fund?

Erik Sullivan

Sellers Seller Articles Seller FAQ

Have you been contacted by a buyer claiming to be a Search Fund? Not sure what that means? Search funds may sound complex, but they’re pretty simple. 

A search fund is an investment group led by one or two individuals, who are funded by investors and searching for a business to buy. 

Search funders will often seek off-market businesses that they can submit an offer on, without the competition of other buyers - they want a proprietary deal

Although search funds can seem similar to regular individuals seeking a business to grow, don’t let this disarm you - they can be very sophisticated. 

With every type of buyer, there are pros and cons to be weighed - the same goes for search funds. In this blog, we will cover the qualities of a search fund, their advantages and disadvantages, and how they are funded. 

Let’s hop in. 

What Buyers Are Considered Search Funds? 

Search funds are considered a type of financial buyer. The most typical profile is a young individual with a high degree of education or some preliminary experience in entrepreneurship. The job of the search fund is to convince investors they have the skills to operate a business and provide a return. Their ultimate goal is to use the investor’s capital to acquire their own company, provide those investors a return, and grow their own business assets.   

They will usually be a recent graduate of a highly ranked business school (Harvard, Duke, Princeton, Yale, Cornell, Stanford, UNC, etc.) with merger and acquisition experience, or they may be a business professional with experience working for a private equity group. 

Regardless of their background, a search fund’s goal will be to find a business they can purchase and grow by stepping in as the operator. 

In all, search funds provide a solution to the passive investor who seeks the high potential returns of a small business, but doesn’t have the time or desire to operate that business. 

The Economics of a Search Fund

Search funds lay out three different return scenarios for their investors - optimistic, base, and pessimistic. Within each of these scenarios, investors will receive a different level of return based on the specific levels of growth in earnings or EBITDA

The search fund’s plan is to grow a business by either improving its operations, its finances, increasing the multiple it could sell for, or a combination of all three. By improving these areas of a business, they can provide their investors with promised returns. 

These are the kinds of growth opportunities search funders will look for when buying a business because they have investors they need to provide returns to. 

What Makes Your Business Attractive to a Search Fund?

Search funders are looking for stable businesses they can grow. Your business may be a fit for a search fund if: 

  • Your business has several clear paths for growth
  • You are not overly involved in the business 
  • You are looking to sell and retire
  • Your business has low customer concentration 
  • Your business is not actively listed for sale 
  • Your business is earning more than $700k in EBITDA

Your business will be most attractive to search funds if it is not currently on the market, since that gives them a better chance at getting a proprietary deal.

Advantages of Selling to a Search Fund

Some advantages of selling your business to a search fund include: 

  • They want to step into your shoes and operate the business as the owner 
  • They are more forgiving when owners are heavily involved
  • They have the knowledge and skills to grow the company

Since search funders usually have gone through business school, they will be more intentional about what they do to improve the business. They will also be able to seek advice from their investors when it comes to larger business decisions.

Disadvantages of Selling to a search fund

While search funds have their advantages, they also have their disadvantages: 

  • They are sophisticated and will ask tough questions 
  • They are less emotional about the business
  • They aren’t always transparent about who their investors are 
  • They are a hard buyer group to quality 

Some searchers may be hesitant to share who their investors are. If they are not willing to talk about their investors - that is not a positive sign. As an owner, you have the right to know where they will be receiving the funding to purchase your business before accepting any offer. 

How is a Search Fund Funded?

Traditional search funds are investor-funded, whereas self-funded search funds are self-funded. In traditional search funds, the search fund individual will prospect multiple investors with similar requirements and goals. 

Some investors may have preferences of the industry, business size, and level of owner involvement the search fund pursues. The search funder takes these criteria into account and adjusts their search to match what their investors want. 

Investors will either provide committed capital or pledged capital to the search fund individual. Once the search fund individual finds an opportunity that their investors have approved, they will make an offer. 

Some search funds will create an operating agreement with their investors to temper the investors’ involvement in the day-to-day operations of the business.  

If the search funder is self-funded, they may attempt to get a loan through the SBA and reach out to investors that would want to be minority partners on the loan. This would allow investors to contribute to the down payment without having to sign a personal guarantee on the loan. 

What to Keep in Mind About Search Funds

If you are a business owner, you should know that search funds will likely reach out to you by phone and are going to be offering to buy your business. 

They are usually sophisticated in acquisitions - if you get a call from them, involve your professional advisors. They are not to be underestimated. 

To learn about unsolicited offers and how they can lead to proprietary deals, read “What to Do if You Receive an Unsolicited Offer.” 

We have led hundreds of business owners through the process of deciding who would be the best buyer for their company. If you need help deciding which buyer is the best fit for your business, reach out to us today. 

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