What is a search fund?
A "search fund" or "searchfund" is an entity set up for the acquisition of a single business. It is one of the fastest and most reliable ways for an ambitious manager to become the CEO of a sizable company. These managers are known in the community as "searchers".
Because searchers are usually first time CEOs, they surround themselves with a network of experienced investors and advisors who not only provide financial backing but also help to run the acquired companies.
The idea of taking relatively younger professionals and mentoring them into CEO roles can be credited to Stanford professor H. Irving Grousbeck who funded the first searcher in 1984.
Who launches search funds?
Once upon a time, searchfunds were an exclusive club only available to graduates of Stanford GSB and Harvard Business School. Today, the model is taught at most of the top MBA programs around the world.
Outside of top business schools, searchers come from various backgrounds. What unites them is the desire to be a company owner and the professional experience necessary to be successful CEOs.
What types of companies are acquired?
Searchers look for companies which are already profitable and stable.
Cashflows from $1m to $10m
EBITDA Margins >15%
High Recurring Revenue
Low Customer Concentration
Defensible Market Position
Searchers will usually pay 3x to 7x for these companies. Popular acquisition industries include Niche Manufacturing, Healthcare Clinics, and Software as a Service.
See more acquisition data.
What does the process look like?
Learn about the model. Usually done in a top MBA program, but also on internships with current searchers.
See job listings.
Gather together a pool of committed investors and advisors and establish the searchfund LLC.
Search for a business to acquire. Using a combination of intermediaries and cold-calling, identify a willing seller of an attractive company and negotiate a profitable deal. This is not for the faint of heart; searchers spend 2 to 3 years in this phase and about 70% are able to complete a deal.
Run and grow the company as the CEO. This is where value gets created.
Phase 5 (optional):
Exit. If successful, the searcher could sell the company for many times the purchase price. On average, searchers will hold on to the company for 8 years. However, some may choose to stay and run their businesses forever.
How many searchfunds are out there?
Searchers will raise capital from a group of investors to look for a company within a geography. These investors have the right of first refusal on any deals.
Searchers finance their own search efforts and only look for outside capital when a deal is found. The terms are negotiated on a deal-by-deal basis.
Searchers raise search capital from a single source rather than from a group of investors, sometimes even co-locating with their investor.
*live crowdsourced data from searchfunder.com