Search Fund Basics: A Beginner's Guide to Business Acquisition
Learn the fundamentals of search funds, from what they are to how they work, and whether this acquisition strategy is right for your entrepreneurial journey.
If you’re considering entrepreneurship through acquisition, search funds might be the perfect vehicle for your journey. This comprehensive guide will walk you through everything you need to know about search funds.
What is a Search Fund?
A search fund is an investment vehicle where an entrepreneur raises capital to find, acquire, and operate a single company. Unlike traditional buyouts, search funds are typically led by first-time CEOs who want to buy and run a business rather than start one from scratch.
The Search Fund Model
The traditional search fund model follows a two-step process:
Step 1: Search Capital
- Raise $400,000 - $500,000 from investors
- Use this capital to cover living expenses and search costs
- Typical search period: 18-24 months
- Goal: Find and negotiate to acquire one company
Step 2: Acquisition Capital
- Once a target is identified, raise $5M - $20M+ for the purchase
- Investors from Step 1 typically participate in the acquisition
- New investors may also join at this stage
Key Benefits of Search Funds
For Entrepreneurs:
- Access to capital without personal guarantees
- Mentorship from experienced investors
- Ability to acquire proven businesses vs. startup risk
- Clear path to CEO role
For Investors:
- Direct access to deal flow
- Opportunity to mentor and guide
- Potential for attractive returns
- Diversification across multiple search funds
Typical Search Fund Targets
Most search funds look for companies with these characteristics:
- Revenue: $3M - $30M annually
- EBITDA: $1M - $5M
- Industry: B2B services, niche manufacturing, healthcare services
- Growth: Stable with growth potential
- Management: Opportunity for searcher to add value
Getting Started
If you’re interested in launching a search fund:
- Prepare thoroughly: Business school or relevant experience helpful
- Network actively: Connect with search fund investors and alumni
- Develop your thesis: Define what types of businesses you’ll target
- Create your presentation: Prepare to pitch to potential investors
Conclusion
Search funds offer a compelling path to entrepreneurship for those who prefer acquiring and improving existing businesses over starting from scratch. With proper preparation and the right investor network, they can be an excellent vehicle for achieving your entrepreneurial goals.
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