By Carl Lundberg
03 Jul 2024
Last updated: 27.10.2026
The origination of the search fund, or ‘funded search’ as it was then called, goes back to 1984 when a student of Professor H. Irving (‘Irv’) Grousbeck, Jim Southern, wanted to be the CEO of a company, but didn’t have the idea for a new venture. Grousbeck encouraged Southern to acquire an existing business instead and, together with some of his business connections, contributed to a fund for Southern to draw on for living and other costs while searching for a business to acquire.
There are earlier examples of leveraged buyouts (“LBOs”), which is the model that tends be used for search fund acquisitions, but 1984 was really the genesis of the asset class as we know it today.
Entrepreneurship Through Acquisition (“ETA”) is a broader term used to describe search funds and other models of entrepreneurial acquisitions, for example self-funded searches, roll-ups and other long-term-hold type vehicles.
In this guide, we share a comprehensive overview of search funds, including:
A search fund is a vehicle used to raise a round of capital that can be drawn upon by an ‘acquisition entrepreneur’ or ‘searcher’ while they search for a business to acquire. These searchers are ambitious and entrepreneurial individuals (or partners) with an aspiration of business ownership. ETA has become increasingly popular, as it mitigates many of the risks that come with starting a business from scratch.
Search funds are usually led by recent MBAs and mid-career professionals interested in business ownership. Meanwhile, investors in ETA can get access to private company equity with relatively small cheques being required.
For existing business owners considering their exit strategy, selling to a search fund can be a mutually beneficial solution. Searchers are looking to grow and nurture the business they acquire.
A traditional search fund is usually focused on only one company, and the searcher has a significant personal investment through both their equity stake and time they will commit to making the company’s future a success. This is often a contrast to the private equity portfolio model, where the acquired company will become one of many. In addition, it’s often necessary for private equity to need a new management team, which is typically identified from external sources and brought in to run the business. This often precludes many small companies from being suitable PE targets.
ETA has evolved significantly since 1984 and there are now many different models for entrepreneurship through acquisition, including: traditional search funds; self-funded searches; single-sponsor searches; and committed capital vehicles like holding companies targeting disparate business acquisitions, or industry roll-ups.
Traditional search funds
The traditional search fund model, originating at Harvard in 1984, involves raising search capital from a group of investors to provide financial support to the searcher during the phase of identifying potential acquisition targets. This covers the salary and pre-transaction costs such as due diligence, legal fees, access to research resources, attending industry events, etc. Investors serve a dual purpose of providing capital and serving as advisers, providing guidance and networking resources.
The popularity of the traditional model has led to generally standardised and consistent terms, allowing for a salary to be drawn by the searcher and preference shares for the investors. The searcher(s) will typically end up with c.16%-30% of the ordinary shares of the Target, depending on whether it is a solo or partnered search and how the business performs under the searchers’ leadership.
A Private Placement Memorandum (“PPM”) is typically required from the searcher, outlining the opportunity, identifying key industry and company features that they are targeting and a background on the searcher themselves, including the skills they bring to the process.
With funding secured, a searcher can begin the process of identifying suitable businesses which meet their investment criteria and have future growth potential.
As a searcher, you can expect to spend up to two or even three years identifying the right business to buy; building a network of investors, and a pipeline of potential acquisition opportunities, meeting fellow searchers, brokers and advisors to support you in the process.
In return for supporting the initial search process, investors will receive a right of first refusal on a potential acquisition and a ‘step-up’ in the value of their search capital (usually by 50%) as it is rolled into the transaction.
Self-funded searchers
Self-funded searchers navigate the first ‘search’ phase without raising search capital to fund themselves, instead investing their own time and resources in identifying potential acquisition targets.
This structure has evolved from the traditional search model, allowing the searcher to focus on the fundraising stage once targets have been identified and retaining greater ownership and control than in the traditional model.
Whilst a traditional search model gives the searcher the flexibility to make search their full-time commitment, self-funded searching gives the searcher more flexibility in the actual ownership and target outcomes of the acquisition process.
This often comes at the expense of transaction size with targets often being smaller than under the traditional model. As with traditional search funds, targets are likely to be stable, mature companies capable of supporting the debt service. Businesses with under-appreciated or under-utilised assets are particularly attractive, as they offer the opportunity to grow at a much higher rate than they have historically, providing some upside against the purchase price. The structure of a self-funded search is often more flexible than a traditional search, which has become far more standardised as the model has matured.
Single-sponsor search funds
Single-sponsor search involves raising capital from one investor, typically a partnership with a private equity firm or family office. The searcher usually co-invests with the sponsor once a suitable acquisition is found. There are several benefits to this model – like the traditional fund, the searchers’ costs during the search period are funded by the investor. In addition, the sponsor can regularly share resources such as transaction databases and market opportunities.
This model may also provide more clarity over exit options, with access to possible exit routes through the sponsor’s other business interests.
This approach requires close collaboration with the sponsor, often providing close mentorship and support – at the cost of lower integration into the wider search community. This collaboration means that the searcher often has less freedom and decision-making power regarding the acquisition that they make, and it limits the entrepreneurial agency of the searcher.
The entrepreneurship through acquisition model enables entrepreneurs to own, manage and grow an existing business. They can use their expertise to build on the existing customer base and operations, avoiding some of the perceived risks associated with start-ups, but providing the equity upside of owning a business.
Search funds, by nature, typically prioritise sustainable growth and stable cash flows. This makes them attractive to investors and lenders by providing downside protection and the ability to diversify their investments across a wide range of businesses. Search funds also allow individual investors to exercise a more active role in the firms they invest in – lending their expertise and experience to the searcher.
Search funds provide multiple attractions to owners, who may be trying to find a buyer for their business so they can retire or de-risk.
Often there is no suitable or willing successor in place to take over as CEO, so a search fund provides a better exit than simply winding down the company. A searcher can step into the CEO role, with the second tier management team providing continuity with the wider team and customers.
The area of the SME market in which search funds typically operate are often underserved by traditional private equity or institutional investors. The characteristics which searchers are looking for are different to those sought by private equity. Targets are often smaller – often too small to interest private equity. In addition, where a succession solution is required, an acquisition entrepreneur can fill that void themselves where private equity would need to find a solution from the market.
Many sellers also prioritise an acquirer who is looking to continue the company name, protect the staff and continue the legacy of the founder.
A good acquisition entrepreneur typically has strong business acumen, leadership and operational skills. However, it is not necessarily essential to have all three to facilitate a successful search.
A determination and willingness to learn will provide the searcher with the opportunity to build skills and experience as they work through the search and operational process.
Often, a searcher may have a background in finance, investment, consulting or senior strategic management, but have never been able to come up with a unique business idea to satisfy their entrepreneurial drive. The opportunity to acquire an existing business gives the chance to fulfil that entrepreneurial aim and to apply the skills and experience earned in previous careers to the management of one or more companies.
In Season 3 Episode 5 of The Found and Funded podcast, Jan Simon, Professor at IESE Business School and Managing Partner of Vonzeo Capital, set out three traits he looks for in a searcher:
Jan also points out that most searchers have excelled in structured environments: university, a good employer, business school. Search, and the CEO role that follows, is completely unstructured, and the CEO is the one who puts the structure in place. Some people make that transition well, and some find it hard. Watch the full episode here:
This can vary depending on the structure of the search fund and the prior experience of the searcher. However, there are some common factors typical to each search fund structure.
Will Abell, Partner at Gerald Edelman, demystifies the process in Season 1 Episode 1 of The Found and Funded podcast, and says “…generally you’re looking for a fairly boring business, something that’s easily understandable…something that ideally has a history of strong cash generation, ideally some growth, some modest sustained growth over a period of time, and ideally a strong second tier management team that can help you and support you as the new CEO.” Watch the full episode here:
In smaller, self-funded deals, there is sometimes little management beyond the retiring owner-manager. That is sub-optimal: knowledge and customer relationships sit with the person leaving, and the new CEO has less support through the transition.
As well as this, the characteristics of a good target opportunity include:
There are four key stages to the search fund acquisition process:
There are two channels for finding search acquisition targets: on-market and off-market.
On-market targets are businesses that are openly listed for sale through channels such as business brokers, online marketplaces, or public listings.
Searchers can identify on-market targets by actively searching through listings, attending industry events, networking with brokers, professional service firms, and utilising online databases and platforms such as Dealsuite (view Gerald Edelman’s unique offering with Dealsuite here), MarktoMarket, Market IQ, Capital IQ etc. which specialise in business sales.
It is now commonplace for searchers to use interns to undertake much of the target analysis, market research and outreach, across both on-market and off-market targets. These are often current MBA students who are looking to build their experience for undertaking a search fund themselves upon graduation. Therefore, these are typically skilled individuals who can carry out detailed research and share part of the research work required to review and value a large number of targets.
Advantages of on-market targets include:
However, competition for on-market targets can be strong, leading to higher purchase prices and less favourable deal terms.
Off-market targets are businesses that are not openly or actively marketed for sale and require a more proactive approach to identify and engage with potential sellers. The sellers may have not considered selling their company so need time and encouragement to start the process.
Searchers can find off-market targets through leveraging personal and professional networks, cold outreach to business owners, attending industry conferences and conducting market research to identify potential acquisition opportunities.
Off-market targets offer the advantage of reduced competition and the potential for more favourable deal terms, as sellers are often open to negotiation and are less constrained by market dynamics. However, finding off-market targets can be challenging and time-consuming, requiring significant effort and resources to identify and establish relationships with potential sellers.
In practice, successful search fund acquisitions often involve a combination of both on-market and off-market strategies. By casting a wide net and utilising multiple channels for sourcing acquisition targets, searchers can maximise their chances of identifying and securing suitable businesses for acquisition. Additionally, maintaining a proactive and persistent approach to networking and relationship-building can help uncover off-market opportunities that may not be readily available through traditional channels.
The numbers involved are sobering. Jan Simon cites a typical funnel of around 3,300 target companies contacted, leading to 256 responses, 125 positive conversations, 25 meetings, 16 price discussions and five LOIs, to complete one acquisition. With that much ground to cover, two questions need answering early with every target: why is the owner selling, and are you in the same ballpark on value?
With a target business identified, a searcher will need to issue and agree a Letter of Intent (“LOI”), at which time it is typical to enter an exclusivity period with the sellers and kick off the due diligence process.
An LOI commonly includes:
An LOI is typically non-binding, except for certain provisions such as exclusivity, confidentiality, costs and governing law, which are usually binding. It serves as a roadmap for the negotiation and drafting of the final acquisition agreement, so it’s essential for both parties to carefully review and negotiate the terms to ensure that they accurately reflect their intentions and expectations for the transaction.
Transaction structuring at the LOI stage is crucial as it sets the framework for the entire transaction.
Overall, structuring the transaction at the LOI stage is critical for laying the groundwork for a successful acquisition.
Beyond the core terms above, several further factors should be considered when structuring a search fund acquisition at the LOI stage:
By carefully considering these factors and addressing them in the LOI, both parties can establish a clear framework for the search fund acquisition and pave the way for a successful transaction process.
Once the initial search has been completed and a suitable target identified, the acquisition funding is the next stage in the process. Capital for the transaction often comes from multiple sources:
In a traditional search structure, equity financing for the acquisition will often come from the same investors who supported the initial search process. In exchange for their investment in the search capital, investors receive equity ownership in the search fund entity, which roll into the transaction if/when one is found, usually with a ‘step up’ of 50%. They will also often ‘follow-on’ with a pro-rata investment of the equity required for the acquisition.
In addition, new investors may be sought if more equity is needed than can be raised from the initial investors.
For self-funded searchers, this is where getting backing from investors begins. It often helps to have built a network of potential investors prior to this stage in order to provide more confidence in achieving a successful fundraise, giving more certainty to the sellers and speeding up the transaction process which in itself will reduce the risks of the transaction not completing.
Investors may include high-net-worth individuals, family offices, venture capital firms, private equity investors, or other institutional investors.
Debt financing may involve obtaining loans from banks or alternative lenders and may come in a variety of formats. Common types of debt financing include term loans, lines of credit, asset-based financing, government-backed loans or hybrid debt and equity arrangements. For businesses with assets on their balance sheet, an asset-based lending facility can unlock that value to provide the funding to support the acquisition process.
For cashflow lending the loan size is determined by a multiple of EBITDA with repayments made from the future cashflows of the business.
Searchers may also explore financing options offered by government agencies or development finance institutions, such as the British Business Bank or regional development funds.
Vendor or seller financing is a common element in search fund acquisitions. Here, the seller of the business provides some of the funding for the purchase. Seller financing terms may include deferred payments, earn-outs, or instalment payments based on the future performance of the business. Seller financing arrangements can help bridge any financing gaps and demonstrate the seller’s confidence in the business.
Equity rollovers may form part of the funding, where the seller or existing management team retains an equity stake in the business post-acquisition.
Equity rollovers align the interests of the seller or management with those of the new owners and can provide continuity and stability during the transition process.
Search fund transactions in the UK are subject to various regulatory considerations, including securities regulations, taxation law, and compliance requirements.
It’s essential for searchers and investors to seek guidance from legal and financial advisers to ensure compliance with applicable laws and regulations throughout the transaction process.
By leveraging a combination of equity and debt financing, along with potential seller financing and equity rollovers, UK-based search fund transactions enable searchers to pursue acquisitions while mitigating risk and maximising returns for investors. Working closely with experienced professionals can help navigate the complexities of financing and regulatory requirements in the UK market.
For investors, search funds can represent an attractive investment class for multiple reasons:
Those investors who participate in the initial round of equity financing will buy investment units in the fund and receive:
A search fund’s success depends on the searcher’s ability to identify, acquire and run a profitable business. Whilst an exciting opportunity, searching for and identifying a target business is also time-consuming and uncertain. There’s also the financial risk – there is no guarantee an acquisition will be completed at the end of the process.
In a traditional search fund, the initial search capital is highly speculative, which is compensated by the step up in equity on acquisition.
For a self-funded search, the searcher is investing – and hence risking – their time and personal resources to finance and undertake the search process.
Other risks to consider include:
The UK was the first market outside North America to adopt the model. Simon Webster raised the UK’s first search fund in the 1990s, has since invested in more than 50 search funds, and teaches entrepreneurship through acquisition at London Business School.
Growth since then has been steady. IESE’s 2024 study records 35 UK search funds launched in the decade to 2023, behind Spain (67) and Mexico (50). Jan Simon’s view is that the UK’s deep and efficient private equity market makes it a harder place to search, particularly in London and the South East, and that many successful UK searchers have acquired businesses elsewhere in the country.
While both search funds and private equity firms target established businesses, their approaches diverge significantly.
Search funds embody a hands-on entrepreneurial spirit. They raise capital to identify and take the operational helm of a single company. This focus enables the searcher to deeply integrate their expertise and drive growth within the acquired business. While roll-up or serial acquisition strategies might exist within the entrepreneurship through acquisition umbrella, the core remains an operator-centric model.
In contrast, private equity firms function on a much grander scale. They manage diversified portfolios, encompassing multiple businesses across various industries. This portfolio approach allows them to spread risk and capitalise on opportunities across a broader spectrum. While PE firms may influence acquired companies through board representation, their primary focus lies in strategic financial management, not day-to-day operations.
Self-funded searchers and traditional search funds who are unable to raise all their required equity from their incumbent investors end up with what is known as an ‘equity gap’. This is a requirement for equity funding that outweighs the commitments they have already received.
In these situations, the searcher must take the opportunity to the market to source investment to fill the gap under the same terms as those committed to by the existing investors. Opportunities exist here for investors who do not have the appetite to invest in the speculative search capital but nevertheless want to invest in SMEs being led by acquisition entrepreneurs.
There are several crucial things to be aware of before proceeding with a search fund acquisition.
As a searcher, you may need a bank loan to part-fund an acquisition. It’s standard practice for banks to ask you to conduct formal due diligence on the business’s earnings. You’ll need an in-depth understanding of the business’s underlying or adjusted earnings and this will need to be verified by a third-party professional before being presented to the bank.
As well as historic earnings, it is key to understand the future maintainable earnings of the business to ensure there are sufficient funds to service debt and be confident about the future performance. When reviewing potential search fund targets, look for realistic and well-supported projections that align with industry trends. Scrutinise the assumptions and methodologies used in creating these forecasts and carry out scenario analysis to understand and plan for the worst-case scenarios. Rigorous due diligence here will help mitigate potential risks. It will also provide a more accurate picture of potential profitability and growth.
Cash generation is key to the search fund model so understanding working capital during due diligence goes hand in hand with this. It helps provide critical insights into the financial health and operational efficiency of the target company. By understanding the components of working capital, the searcher can gain a comprehensive understanding of the company’s liquidity, cash flow generation and short-term financial obligations.
This is essential for assessing the adequacy of working capital to support ongoing operations, identify potential red flags such as cash flow constraints or excessive inventory levels, and formulate strategies for post-acquisition integration and optimisation. Understanding this will allow you to negotiate favourable terms, mitigate financial risks, and ultimately enhance the likelihood of a successful transaction.
When buying a business, you’re often acquiring everything within the company. This can mean its past and present liabilities. A thorough legal, tax and financial due diligence process will help to ensure you understand what you’re purchasing. It checks the company complies with all relevant tax laws and any current legal issues or claims. You’ll identify the business’s commitments and obligations, such as leases and loans.
Due diligence is essential to the search fund process. It ensures you understand what you’re committing to. You’ll be able to identify and mitigate potential risks and meet investor requirements.
At Gerald Edelman, we provide tailored advice for every stage of the search fund process. With our expertise in accounting, taxation, due diligence and financial planning, you can make informed decisions. Contact us today to find out more.
For a deeper exploration of Search Funds, explore the following resources:
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