Search Funds: The Ultimate Guide

Starting a business through acquisition is a proven path for entrepreneurs, and search funds provide an effective way for aspiring entrepreneurs to acquire and grow an existing company, offering an alternative to building one from scratch.

This model has become popular, especially among recent MBA graduates and motivated managers. It allows entrepreneurs to bypass many early-stage challenges by acquiring a company with established operations and a customer base. In this guide, I’ll break down the process, the roles of entrepreneurs and investors, and why search funds are becoming an appealing investment vehicle.

Read: How to Start a Search Fund — The Ultimate Guide

Definition and Origin of Search Funds

A search fund is an investment vehicle created to finance the acquisition of an existing company by an entrepreneur. This model, pioneered at Stanford Graduate School of Business in 1984, offers a route for young entrepreneurs to become CEOs of established businesses instead of building one from scratch.

Typically, the entrepreneur raises initial capital from investors to search for, acquire, and manage a company. The model is unique in that it involves two key stages: raising capital for the search phase and using that capital to acquire a target company. After the acquisition, the entrepreneur takes over daily operations, intending to grow the business and deliver returns to investors.

The Search Fund Model Explained

The model consists of several key stages:

1. Raising capital for the search phase – In this phase, the entrepreneur raises funds from investors, typically private equity firms, family offices, or other investors, to support the search process.
2. Identifying and acquiring a target company – Once the capital is raised, the entrepreneur begins the search for an acquisition target. The ideal target is usually a small, privately held company with stable cash flows and growth potential.
3. Operating the acquired company – After the acquisition, the entrepreneur takes over the company, manages operations, and works to grow the business through strategic improvements, marketing, and operational changes.
4. Developing an exit strategy – The entrepreneur eventually seeks an exit, either by selling the company or taking it public, providing returns to the investors.

The Search Fund Process: A Step-by-Step Guide

The Search Phase

The search phase is a critical period for any search fund. During this time, the entrepreneur works to identify the right target company to acquire. The search fund entrepreneur needs to consider several factors when evaluating potential businesses, such as:

• Stable Cash Flows: Search funds tend to focus on businesses with consistent and predictable revenue, often in industries with stable demand and recurring revenue, such as light manufacturing companies or service businesses.
• Growth Potential: The target company should have opportunities for operational improvements, add-on acquisitions, or market expansion.
• Target Industry: The entrepreneur must evaluate industries and target businesses where they can add value. Many search funds focus on fragmented industries where multiple smaller companies may offer acquisition opportunities.

The search phase can take up to two years, and it requires a well-defined strategy to find the right target company. Investors in search funds are often looking for companies with sustainable market positions and the potential for growth under new management.

The Acquisition Phase

Once the right target company is identified, the next step is the acquisition phase. During this phase, entrepreneurs and their team negotiate the terms of the acquisition, raise additional capital if needed, and complete due diligence.

Key elements of the acquisition phase include:

• Due Diligence: This process involves a detailed review of the company’s financials, operations, legal status, and market position. Entrepreneurs need to ensure that the target company is financially sound and free from legal liabilities.
• Equity Portion and Financing Structure: The acquisition is usually funded through a combination of equity from investors and acquisition capital. The search fund entrepreneur may also use debt financing to complete the deal.
• Post-Acquisition Strategy: After the deal is finalized, the entrepreneur takes over the day-to-day operations of the acquired business. The goal is to drive growth through improved operations, marketing, and possibly acquiring additional businesses to expand the company.

Due Diligence and Valuation

Due diligence is one of the most important aspects of the acquisition phase. During this process, the entrepreneur will:

• Analyze the company's financial statements, focusing on cash flow, recurring revenue, and profitability.
• Assess the company's operational efficiencies and identify areas for improvement.
• Evaluate the management team, especially if the entrepreneur has no prior direct experience in the industry.
• Consider market conditions, customer base, and competition to determine the growth potential.

Valuation is also a crucial part of the process. The entrepreneur and their team must agree on a fair price for the company, considering its current financial state and future potential.

Read: How to Find & Land a Search Fund Internship

Key Players in the Search Fund Ecosystem

Entrepreneurs

These individuals are often recent MBA graduates or those with limited capital but a strong desire to manage an existing business. Many have no prior experience in business operations, but they bring fresh perspectives and a strong work ethic. These entrepreneurs raise capital, identify a target company, and manage the acquisition and day-to-day operations. They must navigate relationships with investors, build a management team, and handle the challenges of taking over an established business.

Investors

Typically, private equity firms, family offices, and venture capital funds, these investors provide capital for both the search and acquisition phases. In return, they expect a share of the profits when the business is sold or goes public. Investors generally look for entrepreneurs who possess the right skills, vision, and determination to turn the business around and help it grow. They often provide mentorship and industry insights to support the entrepreneur.

Fund Managers

Fund managers oversee the activities of the fund, maintain relationships with investors, and support entrepreneurs throughout the process. These professionals bring expertise in deal structuring, fundraising, and business operations, often coming from backgrounds in private equity or venture capital.

Types of Search Funds

Self-Funded Search Funds

Self-funded search funds are a unique model where the entrepreneur raises the initial capital without relying on external investors. This model has gained popularity, especially among entrepreneurs with limited capital resources but a strong network of potential investors.

The main challenge for self-funded search fund entrepreneurs is raising enough capital to complete the search phase and acquire a target business. However, the benefit is that the entrepreneur retains full control of the company once it is acquired.

Traditional Search Funds

Traditional search funds rely on external investors for both the search capital and acquisition capital. This model is more common and is favored by investors who are looking for a more hands-off approach, allowing the search fund entrepreneur to run the business. Traditional search funds tend to focus on established businesses with stable cash flows and a strong potential for growth.

International Search Funds

International search funds have emerged in regions like Latin America, Western Europe, and other private markets. These funds tend to target small businesses in industries with high growth potential but limited competition. Entrepreneurs interested in international search funds often focus on regions with fragmented industries and multiple acquisition opportunities.

Raising Capital: The Foundation of a Search Fund

How to Raise Capital for a Search Fund

Raising capital is one of the most important tasks for any search fund entrepreneur. Entrepreneurs must approach private equity firms, family offices, and other investors to secure the necessary funding for both the search phase and the acquisition phase. The entrepreneur must demonstrate a clear understanding of the target industry, the company they plan to acquire, and how they intend to grow the business.

The key to successful capital raising is building trust with investors. Entrepreneurs must show that they have a solid plan, a capable team, and the drive to make the business successful.

The Role of Investors in Search Funds

Investors in search funds provide the necessary funding to support the search and acquisition phases. They often bring valuable industry knowledge and experience, which can help the entrepreneur navigate challenges during the acquisition phase. In return, investors typically expect a share of the profits when the company is sold or goes public.

The Benefits and Risks of Search Funds

The Advantages of Search Funds

• Opportunity for Entrepreneurs: Search funds give entrepreneurs with limited experience the chance to acquire and manage an established business.
• Stable Cash Flows: They focus on small businesses that already have stable cash flows, which can lower risk.
• Higher Returns for Investors: Investors often see better returns compared to traditional private equity investments due to the potential growth of the acquired company.

Risks and Challenges of Search Funds

• Identifying the Right Target Company: The entrepreneur must find the right company to acquire and effectively carry out the acquisition process.
• Business Performance Risk: There's a risk that the acquired business may not perform as expected, potentially leading to lower returns or even losses.
• Investor Risk: Since search funds typically rely on a small group of investors, there’s a higher risk if one of them withdraws or fails to meet financial commitments.

How to Become a Search Fund Entrepreneur

Skills and Qualifications Needed

To succeed as a search fund entrepreneur, you need a mix of business acumen, leadership skills, and the ability to manage relationships with investors. While some entrepreneurs have direct experience in the industry they are acquiring, many have no prior direct experience. This model is ideal for those who have a strong background in entrepreneurial studies or an MBA from a graduate school of business like Stanford University.

Educational Pathways and Networking

Many aspiring entrepreneurs pursue MBA programs at top schools such as Stanford University Graduate School of Business, IESE Business School, or other top institutions. Networking with other search fund entrepreneurs, investors, and industry professionals is also crucial for success.

The Bottom Line

Search funds offer a proven path for entrepreneurs who want to acquire and grow an existing business. By focusing on stable, cash-flowing companies with growth potential, search fund entrepreneurs can mitigate many of the risks associated with starting a business from scratch. While the process requires substantial effort and capital, search funds provide the opportunity for high returns, making them an appealing choice for both aspiring entrepreneurs and investors.

Ready to explore the search fund model and take your entrepreneurial career to the next level?

Contact our expert coaches today to access expert guidance and resources that can help you succeed in the world of search funds!

Read next:

• List of Top Search Funds (2025-2026)
• 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. Private Equity: Differences & What to Know

FAQs

What does a search fund do?

• A search fund is an investment vehicle where search fund entrepreneurs raise capital to acquire and manage an existing business, typically a small business or privately held company. The goal is to take over an acquired company, improve operations, and grow it for profit.

What is the difference between a search fund and a VC?

• While both search funds and venture capital (VC) involve investing in businesses, search funds focus on acquiring existing businesses with stable cash flows, while VC funds typically invest in high-risk, early-stage companies with growth potential.

How much money do you need for a search fund?

• The capital required for a search fund varies, but generally, entrepreneurs raise between $300,000 to $500,000 for the search phase and additional funds (usually $10 million to $30 million) for the acquisition phase.

How successful are search funds?

• The model has proven effective, especially for motivated managers who acquire businesses with recurring revenue and stable cash flows, but success depends on finding the right target company and managing the acquisition effectively.

What is a search fund vs private equity?

• Search funds tend to focus on smaller, privately held businesses, often with limited capital resources, whereas private equity funds typically invest in larger businesses. Search funds usually involve fewer investors, and the entrepreneur manages the acquired business, unlike private equity firms that may hire a management team.

Are search funds profitable?

• Yes, search funds can be profitable, particularly when the acquired business has stable cash flows, growth potential, and a strong market position. Many successful search funds generate high returns on invested capital.

What is the search fund model?

• The search fund model involves entrepreneurs raising capital to search for, acquire, and operate an existing business. The model is typically split into two phases: the search phase (raising capital to find a target company) and the acquisition phase (using raised capital to buy the company).

How is a search fund different from private equity?

• Unlike private equity, which typically focuses on larger businesses, search funds focus on acquiring smaller, privately held companies. Search fund entrepreneurs often manage the business after acquisition, while private equity firms may employ a management team.

What is a search fund example?

• An example of a search fund is an aspiring entrepreneur raising capital to acquire a light manufacturing company with stable cash flows, improve operations, and drive growth. This aligns with the search fund model, where entrepreneurs manage the day-to-day operations of the acquired business after acquisition.