The #1 Question People Ask Me: What is a Search Fund?

By: Daniela Jaramillo

I source B2B software and services deals for Search Funds, so I spend most of my workdays on calls with business owners, C-levels, and Chairpersons talking to them about the potential sale of their business. The most common questions that I get after I introduce myself and what I do are: 1.) What is a Search Fund?! and 2.) Why should I sell my business to a Search Fund? In this blog post I'll be answering question #1, we'll get to question #2 in a separate post.

A Search Fund is a unique investment model where an entrepreneur raises money from investors to find, acquire and operate a single, profitable business. The entrepreneur has the task of finding businesses that have strong potential for growth, negotiating a deal with the seller and then managing the operations of the company to increase profitability. Under this model, investors are ultimately investing in the entrepreneurs (AKA "Searchers") themselves, and believe that that this person/team has the potential to take a business to the next level.

Search Funds were first pioneered in the 1980s by H. Irving Grousbeck, a professor at Stanford Graduate School of Business. They offer bright minds who don't necessarily have a startup idea of their own, but have the desire to become business owners, the opportunity to become entrepreneurs through acquisition.

The process often starts with the entrepreneur raising funds from a group of investors to finance their search for a promising business (this is the most typical Search model today, though self-funded Searches also exist. More on that in a later post). Searchers typically have a 24 month runway to source and then acquire their ideal business. Once a target company is acquired, the entrepreneur assumes leadership and works on improving the operations and expanding the sales to increase profitability.

Successful Search Funds have been effective at providing both entrepreneurs and investors with substantial returns on their investments. These are pretty smart people running already successful businesses. It's a model that works really well, with only one minor inconvenience...finding a perfect acquisition candidate can be tough!

And that's where Search Fund Sourcing comes in. We've been talking to business owners and C-levels for years and know when several promising businesses are planning to exit. We're expert matchmakers specializing in making meaningful connections.

When they are ready, we connect business owners with our Searchers who ask them questions to evaluate fit. If there seems to be a match, businesses will typically provide some high level financial data to the Searchers, who will then evaluate the business as a whole and provide the business owner with an indication of what they could pay for the business. If the offer interests the business owner, the two parties will dive full force into a diligence process that will hopefully end in a closed deal, leaving the Searchers as the new C-levels of the business, and giving the former business owner the liberty to pursue other undertakings. It's a streamlined process with little upfront commitment to get to an indication of interest; neither party spends unnecessary time until both parties have agreed on a valuation range, high-level transition plan, etc.

If you're a business owner looking to sell you're business, and the idea of selling to a Search Fund interests you, please reach out!

And if you're a Searcher in need of sourcing help, please reach out as well!

Thanks for reading, until next time!

Daniela Jaramillo

Founder, Search Fund Sourcing

daniela@searchfundsourcing.com