How does a search fund work?

A search fund is a two-phase investment vehicle where an entrepreneur raises initial capital ($400K–$600K) from investors to fund a 2-year search for a business to acquire. Once a target is identified, the same investors provide acquisition capital. The searcher typically receives 20–30% equity in the acquired business. Search funds have a strong track record — Stanford reports 30%+ average IRR to investors.

The search fund model is a proven path to business ownership backed by institutional-quality investors. Here's how it works:

Phase 1: Raise Search Capital ($400K–$600K) - Approach 10–20 investors for $30K–$50K each - Investors receive the right (not obligation) to invest in the acquisition - Search capital covers 2 years of salary, travel, and professional fees - Typical searcher salary: $100K–$150K/year during search phase

Phase 2: Search (18–24 months) - Full-time search for the right acquisition target - Screen hundreds of opportunities - Deep-dive on 10–20 prospects - Submit LOIs on 3–5 businesses - Close on one acquisition

Phase 3: Acquisition - Present deal to search investors — they have "step-up" rights to invest first - Investors typically provide equity at 1.5–2.0x their original search capital - Additional capital from new investors or debt (SBA, bank financing) - Total deal size: typically $5M–$30M enterprise value

Phase 4: Operate & Grow (4–7 years) - Searcher becomes CEO of the acquired business - Implement operational improvements and growth strategies - Build value through revenue growth, margin expansion, and multiple expansion

Phase 5: Exit - Sell the business after 4–7 years - Distribute returns to investors - Searcher receives their equity share (20–30%)

Search fund economics: | | Amount | |--|--------| | Search capital raised | $400K–$600K | | Searcher salary during search | $100K–$150K/year | | Acquisition equity raised | $3M–$15M | | Searcher equity ownership | 20–30% (vested over time) | | Typical hold period | 4–7 years | | Average IRR to investors | 30%+ (per Stanford data) | | Success rate | ~70% of searchers acquire a business |

Who invests in search funds: - Dedicated search fund investors (individuals who invest in 10+ funds) - Family offices - Former searchers who exited successfully - Business school professors and alumni networks - A few institutional investors (increasingly)

How to start a search fund: 1. Attend a search fund conference (Stanford, IESE, HBS) 2. Build your PPM (Private Placement Memorandum) 3. Network with established search fund investors 4. Raise your search capital 5. Begin the search 6. Use deal sourcing tools (SearchStreet) to build pipeline

Key Takeaways

  • Search funds raise $400K–$600K to fund a 2-year acquisition search
  • Searchers receive 20–30% equity in the acquired business
  • Average IRR to investors exceeds 30% per Stanford research
  • ~70% of searchers successfully acquire a business within 2 years

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