Why is search fund activity on the rise and what does it mean?

Over the past decade, search fund and Entrepreneurship Through Acquisition (“ETA”) models have quietly moved from niche investment models to mainstream pathways for aspiring entrepreneurs, savvy investors and business owners looking for a successor who will carry their legacy forward.  

What began as a novel way for MBA graduates from select North American Universities to identify, acquire and operate small to medium sized businesses, has since gained traction, attracting capital from investors and fuelling a new generation of owners. With lower risk profiles compared to traditional startups and the potential for strong returns, search funds are reshaping entrepreneurial talent. 

We have seen this trend first-hand at Gerald Edelman. The number of ETA and Search Fund deals we advised on more than doubled in the past year, showing significant growth. Between September 2023 and August 2024, we supported nine such transactions and in the following 12 months, that number increased to 19, underlining the momentum behind the model. 

Sector activity

Healthcare accounted for around a third of our recent deals, reflecting the sector’s resilience and consistent revenues. The remaining transactions involved B2B service businesses across industries including industrials, water treatment, engineering, IT services, environmental consulting, and manufacturing. The predictable revenue models in these sectors makes them particularly appealing for searchers and investors seeking lower-risk opportunities with the potential for strong returns.  

Why ETA is growing

One reason for the surge in business growth is the “silver tsunami” of baby boomer business owners approaching retirement. ETA provides them with a succession solution as well as a capital exit, often helping to ensure the long-term stability of their businesses. 

There is also greater academic awareness of the model. ETA began at Harvard University but is now taught at leading business schools including IESE, London Business School and Stanford University. As awareness of the model increases within and outside of business schools, more are choosing to pursue acquisition as an alternative to starting a business from scratch, which often comes with higher risk, and from choosing other more common career paths. 

Another reason for the surge is the increase in investor appetite. Stanford’s 2024 study showed that traditional search funds in North America have delivered an average 4.5x return on investment and a 35.1% internal rate of return since 1984. Outside North America, IESE reported top performers returning as much as 31.4x. These results highlight the strong potential of the model on a global scale and success rates have provided an injection of confidence for entrepreneurs.  

Traditional vs self-funded models

The structure of involves raising capital upfront from a group of investors to fund the search phase. The searchers then return to the investors to fund the acquisition once a deal has been agreed. In contrast, self-funded searches rely on the individual searcher covering their own costs during the search phase. Outside investors are brought in once a specific target has been identified. This model gives searchers greater autonomy and flexibility in choosing deals, and often the opportunity to retain a larger equity stake. However, it places more financial risk on the searcher, making it better suited to those with access to personal capital and previous experience in transactions.  

Alongside these two approaches, we are also seeing a rise in serial acquirers pursuing multiple acquisition strategies. They often incorporate a holding company in which they raise equity investment for use in a clearly defined buy and build strategy. These variations are helping to increase the overall volume of transactions and broaden participation in the market. 

The ideal search fund/ETA target is a profitable company in a growing industry with substantial recurring revenue, low capital expenditure and high cash conversion. Such characteristics limit downside risk for investors and lenders, whilst providing a good platform from which to grow.  

A people-first approach

When it comes to ETA, it’s more than just the numbers. One of the best parts of advising on such deals is the long-term relationships it builds with likeminded entrepreneurs. As our CEO, Carl Lundberg, explains: 

“We particularly enjoy working with searchers, many of whom are young, intelligent, and ambitious individuals whose entrepreneurial spirit resonates with our own values. We are not just supporting them at the point of acquisition, we often become their trusted advisor throughout the lifecycle of ownership, from acquisition to exit and beyond. It is deeply rewarding to be a part of the journey.” 

Looking ahead

With more entrepreneurs embracing ETA, and SMEs open to succession solutions, the UK market for search funds is set for further growth. 

At Gerald Edelman, we provide tailored advice for every stage of the search fund/ETA process. With our expertise in transactions, accounting, taxation, and financial planning, you can make informed decisions. Contact us today to find out more.