How to Start a Search Fund — The Ultimate Guide

Starting a search fund is an exciting and rewarding entrepreneurial path, but it can also be complex. A search fund is a unique investment vehicle where an entrepreneur, known as a search fund entrepreneur, raises capital to search for, acquire, and operate an existing business. This process offers an alternative to starting a new business from scratch and is commonly used by recent MBA graduates, including those from top MBA programs like Stanford University.

In this guide, we’ll walk you through everything you need to know about a search fund, from raising capital to successfully managing an acquired company.

Read: Search Funds: The Ultimate Guide

An In-Depth Look: What Is a Search Fund?

A search fund allows an entrepreneur to raise money from investors to acquire and run an existing business.

Instead of starting a business from scratch, the entrepreneur looks for a business that's already up and running, but might need some improvements or growth to reach its full potential.

Here's a breakdown of how it works:

Raising Capital (Money)

The entrepreneur, called a "searcher," starts by raising money from investors. These investors trust the searcher to find a good business to buy. The money raised is used to fund the searcher's efforts in looking for a business to acquire.

Searching for a Business

With the money, the searcher starts looking for a business to buy. They typically search for businesses that are already successful and making money, but could be improved or expanded in some way. The businesses are usually small to medium-sized, and often in industries like healthcare, manufacturing, or services.

Acquiring the Business

Once the searcher finds the right business, they use a combination of the money they raised from investors and sometimes even loans to buy the business. The searcher then takes control of the company, often becoming the CEO or leader of the business.

Growing the Business

After buying the company, the searcher works to make it better. This could mean increasing sales, cutting costs, improving operations, or finding new ways to grow. The goal is to make the business more valuable over time.

Selling the Business (Exit)

Eventually, the searcher will look to sell the business for a profit. This could happen in a few years or more, depending on how much the business has grown. When the business is sold, the investors who funded the search receive a share of the profits.

In short, a search fund offers a pathway for aspiring business owners to skip the startup phase and instead focus on growing a proven business with investor support. This has become a popular method for many recent MBA graduates and entrepreneurs looking for a relatively low-risk way to gain control over an established company.

The Search Fund Model vs. Traditional Private Equity

While both search funds and private equity involve acquiring companies, there are differences in their structure and approach. Private equity investors often take control of larger, more established companies, usually with a larger fund.

Search funds tend to focus on smaller businesses with lower enterprise values, typically between $2 million and $10 million. This model is often used by individuals or small groups who seek to acquire a single company to manage, rather than a portfolio of companies.

Read: Search Fund vs. Private Equity: Differences & What to Know

The Two Phases of a Search Fund

A search fund is divided into two main phases: the search phase and the acquisition phase. Let’s break down each one.

Phase 1: The Search

This phase involves raising capital to fund the search for a target company.

Raising Initial Capital

You first need to raise initial capital. This money is typically raised from search fund investors, who provide the funding for the search process. These investors are often people who have experience in corporate finance, private equity, or venture capital. The amount raised can range anywhere from $200,000 to $1 million, depending on the scope of the search.

You may choose to go the self-funded search route, where you fund the search phase yourself or with limited investors. This approach requires less oversight from outside investors but can be more challenging to finance.

Read: How to Run a Self-Funded Search Fund (2025)

Identifying and Evaluating Target Companies

Once capital is raised, the search fund entrepreneur begins the search process. The primary goal is to find a profitable business to acquire, usually one that is small and has room for growth. Here’s where business brokers can play a crucial role in connecting searchers with potential companies. You will need to evaluate companies based on factors such as cash flow, profitability, and the potential for growth.

Some characteristics of a good target company include:

• Consistent cash flow: The company should generate steady revenue and be financially healthy.
• Profitable business model: The target business should have a proven model that can be scaled.
• Opportunity for operational improvements: There should be opportunities to streamline operations or improve profitability.

Phase 2: The Acquisition

After identifying the target company, the next step is to acquire it. This involves raising acquisition capital, negotiating the deal, and closing the transaction.

Raising Acquisition Capital

In this phase, you will need to raise acquisition capital. This capital is used to fund the purchase of the business. Search fund investors, private equity funds, and other investors typically provide this funding. The goal is to structure the deal in a way that is attractive to both you (the entrepreneur) and the investors.

Typically, this involves a mix of debt and equity, with the entrepreneur contributing a portion of the capital. You may also use seller financing in some cases, where the seller agrees to finance part of the purchase price.

Negotiating the Deal

You’ll need to agree on a fair purchase price based on the company’s valuation, taking into account its cash flow, enterprise value, and other factors. The negotiation phase also involves structuring the terms of the deal, including debt, equity, and seller financing if applicable.

Building a Strong Search Fund Team

Starting a search fund isn’t just about finding and buying a business. You’ll need the right team to help run the company and grow it over time. Here’s how to build that team:

The Leadership Team

The leadership team is the backbone of your search fund model. This team includes key individuals who will help you take control of the existing business and grow it into something more profitable.

• Search Fund Entrepreneur (CEO): As the search fund entrepreneur, you’ll usually take on the leadership role in the acquired company. Your job will be to oversee day-to-day operations and steer the business toward inorganic growth. This is the most important role, as you’ll be responsible for executing your strategy and improving the business.
• CFO (Chief Financial Officer): The Chief Financial Officer (CFO) manages the cash flow, budgeting, and financial reporting to keep the business financially healthy and on track for growth.
• COO (Chief Operating Officer): The COO focuses on improving the company’s operations. They help streamline processes and make the business run more efficiently.

The Advisory Board

Along with the leadership team, you’ll need a strong board of advisors. These advisors can guide you through the complexities of a search fund acquisition, drawing on their experience in private equity or corporate finance.

Your advisory board might include experts from private equity firms, venture capital, or successful search fund investors. Their input will be invaluable, especially when it comes to making decisions around acquisition capital, understanding due diligence, and helping you navigate challenges that arise.

The Operational and Functional Team

Once you acquire the company, you’ll need to build out your team with specialists who can handle specific functions. These may include:

• Marketing and Sales: Building the business means increasing revenue. The sales manager will lead customer acquisition, while the marketing manager will build brand awareness.
• Human Resources (HR): A solid HR manager will help recruit the right talent and maintain a strong company culture as the business grows.
• IT/Systems: An IT lead will ensure you have the right systems in place to manage business operations and facilitate growth.

Note: With the right team in place, your search fund can thrive and achieve significant returns on your investment.

Post-Acquisition Strategy — Managing the Business

Once the business is acquired, the next step is managing it effectively to ensure its growth and profitability. This involves focusing on operations, improving cash flow, and making decisions that will drive the business forward.

Operational Focus and Management

This means paying close attention to the day-to-day operations of the business, improving efficiency, and finding ways to increase profitability. As the entrepreneur and new leader, you will be responsible for managing the business, leading the team, and driving growth.

Add-On Acquisitions

In addition to managing the acquired company, search fund entrepreneurs often look to expand by making add-on acquisitions. This strategy involves acquiring other companies in the same industry to increase market share and drive inorganic growth. Add-on acquisitions can help create synergies and expand the business quickly.

Financial Considerations and Expectations for Investors

When starting, it is important to understand the financial expectations of investors. Investors expect a certain return on their investment, and it’s up to the search fund entrepreneur to meet these expectations.

Typical Search Fund Returns

Investors generally look for returns of around 20-30% per year. This can vary depending on the success of the acquisition and the growth of the business. A key metric to track is the internal rate of return (IRR), which measures the profitability of the investment.

Note: Maintain open communication with your investors. Update them on progress and ensure that their expectations are aligned with the goals of the business.

Challenges in Starting a Search Fund and How to Overcome Them

Starting a search fund comes with its challenges. The search phase can be lengthy and competitive, and raising capital can be difficult, especially if you’re new to the field.

Deal Sourcing Challenges

Finding the right target company can be one of the biggest hurdles in the search fund process. The market for small businesses is competitive, and it can be challenging to find profitable businesses that are ready to sell.

Building relationships with business brokers and industry professionals can help increase your chances of finding the right business to acquire.

Financial Hurdles

Many search fund entrepreneurs face financial hurdles when raising capital, especially when working with outside investors. Overcoming these challenges often involves building a solid business plan and showing investors the growth potential.

Learning Curve

As a new search fund entrepreneur, you will face a significant learning curve as you shift from being an investor to an operator. Learning how to manage an acquired business, handle day-to-day operations, and make strategic decisions is crucial to success.

The Bottom Line

Starting a search fund is a rewarding entrepreneurial path, but it’s not for everyone. If you’re determined, resourceful, and ready to acquire and manage an existing business, it could be a great fit. As a search fund entrepreneur, you’ll need to raise capital from search fund investors and navigate challenges like deal sourcing and managing the business.

But if you have the right mindset, a search fund offers a low-risk way to control and grow a proven business.

Ready to Start Your Search Fund?

If you're interested in learning more about starting a search fund, we can help. From raising capital to finding the right target company, we guide you through the process. Contact our expert coaches to get started on your search fund journey!

Get access to our proven cold outreach templates designed specifically for search fund roles. Use the same frameworks that top candidates rely on to secure interviews with operators and investors.

• The Ultimate Cold Outreach Template
• Cold Outreach Template
• Email and LinkedIn Networking Templates for Outreach

Read next:

• Top 20 Search Fund Investors (And What You Need to Know)
• Search Fund Financing: The Different Types & What to Know
• Independent Sponsor vs. Traditional Search Fund: Differences & What to Know
• Search Fund vs. Venture Capital: How to Know Which One is Right for You
• How to Find & Land a Search Fund Internship

FAQs

How much to start a search fund?

• Starting a search fund typically requires raising initial capital between $200,000 to $1 million to cover search costs. Once you find a target company, you’ll raise additional acquisition capital to purchase the business, often from private equity funds, venture capital, or other investors.

What are the 3 F's for funding?

• The 3 F's refer to Friends, Family, and Fools; informal sources of early funding. These are often the first people an entrepreneur may turn to when raising capital for a search fund before approaching more institutional investors like private equity funds.

How much do search funds make?

• The earnings from a search fund can vary widely. If successful, the returns for the search fund entrepreneur and investors can be substantial, often aiming for returns of 20-30% annually. The exact profit depends on the target company, how well it grows under new management, and the eventual exit strategy.

Do I need a license to start a fund?

• You don’t need a specific license, but you must comply with financial regulations. It's recommended to consult a Stanford professor or a financial expert to understand legal and regulatory requirements when raising capital from investors.

Do I need an MBA to start a search fund?

• While you don’t necessarily need an MBA to start, many successful search fund entrepreneurs are recent MBA graduates, especially from top programs like Stanford University. An MBA can provide valuable knowledge in areas like corporate finance, investment, and business management that are essential for search funds to operate effectively.

How much do search fund owners make?

• Search fund owners, or entrepreneurs, typically earn a salary while managing the acquired company, which can range from $150,000 to $300,000 depending on the size of the company and its success. They also benefit from equity, meaning their true earnings depend on the company’s growth and the eventual sale, which could result in significant profits if the target company performs well.