There Is a New Breed of Business Buyer — And They Might Be Perfect for Your Company
If you are a business owner considering a sale, you have probably heard about private equity firms and strategic acquirers. But there is a third category of buyer that has grown dramatically over the past decade and is particularly active in the $1M to $10M EBITDA range: the search fund entrepreneur.
Search funds represent one of the fastest-growing segments of the lower middle market acquisition landscape. Understanding how they work, what they look for, and how they differ from other buyers can expand your universe of potential acquirers and potentially lead to better outcomes for you as a seller.
What Is a Search Fund?
A search fund is a vehicle through which an aspiring entrepreneur — typically someone with an MBA from a top business school or significant corporate experience — raises capital from investors specifically to find, acquire, and operate a single business.
The model follows a structured two-phase process:
Phase 1: Search Capital. The searcher raises $400K to $800K from a group of investors — usually 10 to 20 individuals — to fund a 12 to 24 month search for the right acquisition target. This capital covers the searcher’s living expenses, travel, professional fees, and deal sourcing costs during the search period.
Phase 2: Acquisition Capital. Once the searcher identifies a target business and negotiates terms, they return to their investor group — and potentially new investors — to raise the equity capital needed to close the acquisition. The total acquisition financing typically combines searcher equity investors contributing 30% to 50% of the purchase price with senior debt covering the remainder, sometimes supplemented by an SBA loan or seller financing.
After closing, the searcher becomes the CEO and operator of the acquired business, with the backing and governance of their investor group. The investors typically receive preferred returns and board representation, while the searcher earns 20% to 30% of the equity through a carried interest structure — similar to private equity but with the searcher actively operating the business rather than managing a portfolio.
Why Search Fund Buyers Are Different
Search fund entrepreneurs differ from other buyer categories in ways that matter significantly to sellers:
They want to operate, not strip. Unlike private equity firms that install management teams and optimize from the boardroom, search fund entrepreneurs are buying a business to run personally. They want to be in the office, build relationships with employees and customers, and grow the business over a 5 to 10 year horizon. For sellers who care about the legacy of what they built, this matters.
They are acquiring one business, not building a portfolio. A search fund entrepreneur’s entire career bet is on your company. They are not spreading risk across a dozen portfolio companies. This means they will be highly attentive, deeply engaged, and personally invested in the success of the business post-acquisition. It also means they will be thorough and careful during due diligence.
They bring fresh energy and education. Many searchers come from top MBA programs — Stanford, Harvard, Wharton, Kellogg — or have significant experience at McKinsey, Bain, Goldman Sachs, or similar firms. They bring modern management frameworks, financial sophistication, and growth ambition to businesses that may have plateaued under the current owner’s bandwidth constraints.
They have patient capital. Search fund investors typically have a 5 to 10 year investment horizon, longer than many PE firms. This means the business will not be flipped in 3 years, employees will have stability, and growth investments can be made without short-term pressure to maximize distributions.
What Search Funds Look For in an Acquisition
Search fund entrepreneurs have specific criteria that distinguish their ideal targets from those of other buyer types:
EBITDA range. Most search funds target businesses with $1M to $5M in EBITDA, though self-funded searchers — those who skip the search capital phase and fund their own search — may look at smaller businesses with $500K to $2M in EBITDA. This range overlaps with the lower end of traditional private equity but represents the sweet spot where search funds are most competitive.
Recurring or highly predictable revenue. Searchers and their investors strongly prefer businesses with contracted recurring revenue, long-term customer relationships, or highly predictable demand patterns. Subscription-based businesses, managed services firms, maintenance contract businesses, and healthcare practices with established patient panels are all attractive.
Low customer concentration. Because the searcher is making a single bet, investor groups are particularly sensitive to concentration risk. Businesses where no single customer represents more than 10% of revenue are strongly preferred.
Manageable complexity. Search fund entrepreneurs are typically first-time CEOs. They are smart and capable, but they are looking for businesses where the operational complexity is learnable within 6 to 12 months. Highly technical businesses requiring deep domain expertise or regulated industries with complex compliance requirements may be less attractive unless the searcher has specific background in that area.
Owner transition feasibility. Searchers expect and plan for a meaningful transition period — typically 6 to 12 months — where the seller helps transfer relationships, knowledge, and operational oversight. Businesses where the owner is willing to support a structured transition are significantly more attractive.
Growth potential. Search fund investors are looking for returns, and returns come from growth. Businesses with clear opportunities for geographic expansion, service line extension, pricing optimization, or operational improvement are more attractive than businesses that have fully optimized their current market position.
How Search Fund Deals Are Structured
Search fund acquisitions typically involve purchase prices in the $3M to $20M range, structured as follows:
The searcher’s investor group contributes equity representing 30% to 50% of the purchase price. Senior debt — often an SBA 7(a) loan for deals under $5M — covers a significant portion. Seller financing of 10% to 20% of the purchase price is common and often expected by SBA lenders. The searcher personally contributes a relatively small amount of equity but earns their ownership through the carried interest structure.
Earnout provisions are less common in search fund deals compared to PE transactions because the searcher — not the seller — will be operating the business. However, seller transition agreements, consulting arrangements, and non-compete provisions are standard.
Valuation multiples for search fund acquisitions typically range from 3x to 6x EBITDA for businesses in the $1M to $5M EBITDA range. This is generally in line with or slightly below what a competitive PE or strategic process might yield, but the trade-offs — owner transition support, business continuity, employee stability, and a genuine operator taking the helm — may justify the difference for the right seller.
The Advantages of Selling to a Search Fund Buyer
For certain sellers, a search fund buyer can be the ideal outcome. The advantages include business continuity with a hands-on operator who is personally invested in the long-term success of the company, employee stability because the searcher needs the existing team and is incentivized to retain them, legacy preservation since the searcher wants to build on what you created rather than restructure it, transaction certainty because search fund investors are committed capital with clear timelines, and a cleaner transition because the searcher is planning to be in the business full-time from day one.
The Limitations of Search Fund Buyers
Search funds are not the right buyer for every situation. The limitations include lower absolute pricing compared to a competitive PE auction, longer due diligence periods because the searcher and their investors are making a concentrated bet, financing complexity because the capital structure involves multiple parties with different interests, and limited ability to pay premium multiples because the searcher’s investors need to achieve their target returns.
How to Find and Attract Search Fund Buyers
Search fund entrepreneurs actively source deals through M&A advisors and business brokers, direct outreach to business owners, industry conferences and trade associations, online platforms like Searchfunder.com and LinkedIn, and MBA alumni networks.
If you want to attract search fund buyers, work with an M&A advisor who has relationships in the search fund community. At Icon, our network includes search fund entrepreneurs and their investor groups, and we proactively market appropriate businesses to this buyer universe as part of our competitive sale process.
The businesses that attract the strongest search fund interest are those with strong fundamentals, willing sellers, clean financials, and clear growth opportunities — which, not coincidentally, are the same attributes that attract every type of premium buyer.
Schedule a confidential conversation about whether a search fund buyer could be right for your business.