What is a search fund? Definition and example
This is for anyone who has heard "search fund" and wants a plain explanation. By the end you will know the two stages of the model, how investors and the searcher split the business, and where the model fits next to buying a business on your own.
What a search fund is in plain words
A search fund is a way to buy one company when you have the time and the skills but not the money. A searcher, often a recent MBA or an experienced manager, raises a small amount from a group of investors. That money pays a salary and costs while the searcher looks for a business, usually for up to two years. When a business is found, the investors who backed the search get the first chance to fund the purchase.
Stanford's Graduate School of Business has tracked the model since the 1980s and publishes a search fund primer and study. The searcher then becomes the chief executive of the company they bought.
The two stages: search capital, then acquisition capital
Stage one is the search. A group of investors each put in a small unit of money, enough to cover about two years of salary, travel, legal and data costs. Stage two is the acquisition. Once the searcher has a deal under letter of intent, the investors decide whether to fund the equity. Debt, often a bank loan or an SBA 7(a) loan for smaller deals, plus a seller note covers the rest.
Two terms are common. First, the step-up: search investors who fund the acquisition usually convert their search money into equity at a premium, often 150% of what they put in. Second, the searcher's equity: a common structure gives the searcher up to a set share of the company, earned in thirds. One third at closing, one third over time, and one third for hitting a performance target. These are common structures, not rules; each group writes its own terms.
An illustrative example
Illustrative example: a searcher raises a search fund, then buys a $10M company.
| Line | Amount | Note |
|---|---|---|
| Search capital raised | $420,000 | 12 investors at $35,000 each |
| Search period | 24 months | Salary, travel, legal and data |
| Purchase price | $10,000,000 | 5x EBITDA of $2,000,000 |
| Bank or SBA debt | $5,000,000 | 50% of the price |
| Seller note | $1,000,000 | 10%, paid over 5 years |
| Equity from investors | $4,000,000 | 40%, raised in stage two |
| Step-up on search capital | $630,000 | $420,000 at 150%, credited as equity |
| Searcher equity, at closing | 8.3% | One third of a 25% total |
| Searcher equity, over 4 years | 8.3% | Earned by staying in the job |
| Searcher equity, on performance | 8.3% | Earned if return targets are met |
In this example the investors put in $4,000,000 of new cash plus the $420,000 of search money, and receive equity credit for $4,630,000. The searcher owns up to 25% if all three thirds are earned. Every figure is invented to show the mechanics; real deals differ.
Where the model fits
A search fund suits someone who wants to run one company for years, not build a portfolio. The alternatives are buying a business with your own money and a loan, which our guide on how to buy a business covers, or raising money deal by deal as an acquisition sponsor. The trade in a search fund is clear: the searcher gives up most of the ownership in return for a salary during the search and a group of investors who have done this before.
Raising a search fund is a securities offering. Many are structured under the SEC's Regulation D, which the SEC explains on its Rule 506(b) page. This post explains the model and does not recommend it or any investment. Acquisitions.com is an advisory firm, not a broker-dealer or a registered investment adviser.
Common mistakes
- Searching too widely. Two years goes fast. Searchers who pick two or three industries early find more.
- Buying a business that needs the owner. The searcher is a new CEO. A company built around one founder's relationships is hard to take over.
- Ignoring the step-up. It is a real cost to the searcher's share of the company. Model it before signing.
- Skipping the lawyer. The investor agreement sets the searcher's equity for a decade. Read every clause.
Questions people ask
How much money does a search fund raise?
The search stage is small, often a few hundred thousand dollars, enough for about two years of salary and costs. The acquisition stage is sized to the business, often millions, and is raised only once a deal is found.
What does the searcher own?
A common structure gives the searcher up to a set share of the equity, earned in thirds: at closing, over several years of running the company, and for meeting return targets. The exact share is negotiated with the investors.
What happens if the searcher finds nothing?
The search money is spent and the investors lose it. The searcher moves on. That risk is why investors spread small amounts across several searches.
Is a search fund the same as an independent sponsor?
No. A searcher is paid a salary to look and then runs the company as CEO. An independent sponsor is usually not paid during the search and often oversees rather than runs the business.
Sources
- gsb.stanford.edu — https://www.gsb.stanford.edu/experience/about/centers-institutes/ces/research/search-funds
- sba.gov — https://www.sba.gov/funding-programs/loans/7a-loans
- sec.gov — https://www.sec.gov/resources-small-businesses/exempt-offerings/private-placements-rule-506b
Pober, M. (2026). What is a search fund? Definition and example. Acquisitions.com. https://acquisitions.com/blog/what-is-a-search-fund/
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