Search Funds

The Search Fund Model Explained

What is a Search Fund?

“

A search fund is an entrepreneurial path undertaken by one or two individuals (the searchers), who raise a small investment vehicle with a group of aligned investors. With capital and mentorship, they search for, acquire, and lead a privately held company for the medium to long term, typically six to ten years.”

– Stanford GSB Search Fund Study 2024

The search fund model originated in the U.S. in the 1980s and has since developed into a recognized pathway for entrepreneurial leadership, with more than 40 years of history. Over the past decade, it has expanded globally, with Europe emerging as one of the most dynamic regions for search funds. Today, it represents a distinctive investment approach that combines entrepreneurial drive with investor expertise to create lasting value in small and medium-sized businesses (SMBs).

Stakeholders

Search Entrepreneur

Raises initial search capital, develops industry theses, identifies a company, and becomes CEO after acquisition.

Investors

Provide both search and acquisition capital, participate in governance, and actively support entrepreneurs with expertise and networks.

Seller

Often founders or family owners seeking succession and a trusted steward for their legacy.

Company

A profitable SMB with stable cash flows, strong fundamentals, and potential for professionalization and growth.

The Five Phases of a Search Fund

Fundraising

Searching

Acquisition

Operating & Growing

Value Creation & Exit

Fundraising

The entrepreneur raises a modest pool of search capital from a group of supportive investors. This capital covers living expenses and sourcing costs for typically two years. Investors not only provide this initial capital but often commit the right of first refusal to participate in the eventual acquisition, creating alignment from the start.

1

Fundraising

Searching

Acquisition

Operating & Growing

Value Creation & Exit

Searching

During the search phase, the entrepreneur develops industry theses and executes a proprietary sourcing strategy to identify attractive SMBs. Instead of relying only on brokers or auctions, searchers proactively contact company owners to uncover opportunities. Investors may act as sparring partners during this phase, challenging hypotheses and providing feedback on potential targets.

2

Fundraising

Searching

Acquisition

Operating & Growing

Value Creation & Exit

Acquisition

Once a suitable company is identified, the entrepreneur leads diligence with active support from investors. The original search backers and additional co-investors provide the equity to acquire the business. At closing, the entrepreneur transitions into the role of CEO, usually owning a meaningful equity stake to ensure long-term alignment.

3

Fundraising

Searching

Acquisition

Operating & Growing

Value Creation & Exit

Operating & Growing

The entrepreneur now runs the company full-time as CEO, typically for six to ten years. Focus areas include professionalizing processes, strengthening teams, expanding offerings, or pursuing bolt-on acquisitions. Investors often sit on the board, providing governance, introductions, and strategic guidance.

4

Fundraising

Searching

Acquisition

Operating & Growing

Value Creation & Exit

After several years of ownership, the company may be sold, recapitalized, or refinanced. Value is created through a combination of steady cash flows, operational improvements, and growth initiatives. Both entrepreneurs and investors participate in the upside, with the entrepreneur’s equity stake often representing a life-changing outcome.

5

Why it works

Aligned incentives

Entrepreneurs and investors succeed together. Equity structures ensure strong alignment: investors share in returns while searchers can achieve meaningful ownership stakes and life-changing outcomes if value is created.

Dedicated leadership

A single, highly motivated entrepreneur focuses 100% on one company, driving change and growth that larger investment models often cannot replicate.

Experienced investors

Beyond providing capital, committed investors actively contribute in diligence, governance, and strategic decision-making. This reduces risk and increases the likelihood of building lasting value.

Attractive target companies

Search funds typically acquire profitable SMBs in stable industries, often niche leaders with competitive moats and significant professionalization potential.

Natural succession dynamics

Many sellers are founders or families seeking a responsible steward, creating win-win situations that facilitate smoother transactions.

Historical Returns

Over more than four decades, search funds have demonstrated outstanding aggregate performance as an asset class. According to the Stanford Graduate School of Business Search Fund Study (2024), the model has delivered:

4.5x

aggregate multiple on invested capital (MOIC)

35%

aggregate internal rate of return (IRR)

Source: Stanford Graduate School of Business, “2024 Search Fund Study”

Disclaimer: This content is provided for informational purposes only and does not constitute investment advice or an offer to invest. Terms, structures, and practices vary by jurisdiction and transaction.