Search Funds: The Next Big Thing in Entrepreneurship?

A search fund is an entrepreneurial journey that one or two individuals — known as searchers — undertake with a small group of aligned investors, some of whom become mentors. The searchers raise capital to search for, acquire, and lead a privately held company for the medium to long term, typically 6 to 10 years. If successful, this becomes a relatively quick path to becoming an owner-CEO. It also leads to attractive financial returns for both searchers and investors and, on a macro level – a thriving, well-run enterprise.

Exploring the search fund process: From fundraising to exit

A typical search fund progresses through four stages: fundraising, search and acquisition, operating and scaling, and eventually, exit. The journey begins with the entrepreneur raising capital from investors who share their vision and expertise. The team then deploys these funds to drive the entire process of locating a suitable business, acquiring it, and taking the reins of management. 

Let’s look at these stages in detail: 

Stage 1: Fundraising

The first step in the search fund process is to raise money from investors. So, creating a business plan that outlines the search fund’s investment thesis, team, and exit strategy is necessary. Investors look for a team with strong operational and financial skills and a deep understanding of the target industry.

The amount of money raised varies depending on the search fund size and the target companies’ price range. 

However, “Search funds mainly search and acquire companies that are valued between $5 and $30 million,” according to the Corporate Finance Institute. 

Stage 2: Search and acquisition.

Once the search fund has raised the necessary capital, it begins the search for a target company. “An average search fund takes approximately 19 months to find and acquire a company,” suggests the Corporate Finance Institute, and the process involves identifying, evaluating, and negotiating the acquisition of potential businesses.

The search fund team conducts extensive research to identify potential targets. This research commonly includes analyzing industry trends, financial statements, and management team profiles. The team also conducts due diligence to assess the target company’s financial health, legal status, and other risks.

Once the search fund has identified a suitable target, it negotiates the terms of the acquisition. This process can be complex and time-consuming, and it may involve lawyers, accountants, and other advisors.

Stage 3: Operation and scaling.

After acquiring the target company, the search fund team takes over the day-to-day operations of the business. This includes developing a business plan, setting financial goals, and hiring and managing staff.

The search fund team then also needs to focus on scaling the business. This may involve expanding into new markets, developing new products or services, or acquiring other companies.

Stage 4: Exit.

The ultimate goal of a search fund is to exit the investment and generate a return for the investors. The shareholders can achieve a return through the sale of the business, an initial public offering (IPO), or a merger with another company.

The exit process is generally elaborate and, hence, time-consuming, and it also involves the involvement of investment bankers, lawyers, and other advisors.

The rise of search funds

Search funds have become increasingly popular in recent years. This is due to several factors, including the rising cost of starting a traditional startup, the increasing availability of capital for search funds, and the growing number of experienced mentors willing to help search fund entrepreneurs.

They offer a unique opportunity for entrepreneurs to acquire a company and learn how to run a business. They are a viable alternative to starting a traditional startup. They are likely to become more popular in the years to come.

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