A growing share of lower-middle-market acquisition offers now come from an individual buyer backed by a small group of investors, rather than from a strategic company or a private equity fund. This model is usually called a search fund, or more broadly entrepreneurship through acquisition (ETA). For an owner weighing an eventual sale, understanding who these buyers are, how they finance a purchase, and how they tend to approach transition can help make sense of the offers that reach a small company. The material below is educational and general, and it is not legal, tax, or investment advice.
What a search fund is
According to Stanford Graduate School of Business, which has studied the model since its origin, a search fund is an investment vehicle through which investors financially support an entrepreneur's effort to locate, acquire, manage, and grow a single privately held company. The vehicle dates to 1984. The person raising the fund is often called the searcher or the acquisition entrepreneur, and the defining feature is that this individual intends to run the acquired business full time as its operating leader, not to hold it as one position in a diversified portfolio.
The structure typically has two stages. In the search stage, the entrepreneur raises a modest amount of capital from a group of investors to fund the process of finding a company, often over a period that can run one to two years. When a target is identified, those same investors, sometimes joined by others, provide the equity to complete the acquisition. Common features of the model include:
- One searcher, one company. The intent is to buy and personally operate a single business for the medium to long term.
- Investor backing. A group of individuals or small funds supplies search-stage and acquisition capital and often serves on the board.
- An operating role. The searcher usually becomes chief executive after closing, rather than installing outside management.
- A multi-year hold. Search-fund holding periods commonly run several years, often in a five to ten year range, longer than the horizon of many financial buyers.
Typical target size and criteria
Search funds concentrate on smaller companies than most institutional private equity. The 2024 Search Fund Study from Stanford GSB, which reviewed hundreds of funds formed in the United States and Canada since 1984, reported a median acquisition purchase price in the mid-teens of millions of dollars at a multiple of roughly seven times EBITDA. Traditional searchers frequently target companies with annual earnings, measured as EBITDA, in a general range of about two to five million dollars, which tends to correspond to purchase prices in the low tens of millions.
Beyond size, searchers often look for characteristics that make a company manageable for a first-time owner-operator, such as recurring or repeat revenue, a fragmented and stable industry, modest customer concentration, healthy margins, and a business that is not overly dependent on the departing owner. Companies in industrial services, healthcare services, software, distribution, and other niche sectors appear frequently in the population. Owners of businesses in this size band, which are often too small to attract large strategic acquirers, are the group most likely to receive search-fund interest. Recurring revenue and a durable customer base tend to matter to searchers because the debt used to finance the purchase must be serviced from the company's ongoing cash flow, so predictability of earnings is a central screening factor rather than a secondary one.
How search funds finance a purchase
Financing for a search-fund acquisition usually combines several sources, and the mix shapes both the price and the closing timeline. The common components are investor equity, senior debt, and often a seller note.
- Investor equity. The searcher's backers contribute the equity portion of the purchase price.
- Senior debt. For deals in the smaller end of the range, an SBA 7(a) loan is a frequent source. The U.S. Small Business Administration lists a maximum 7(a) loan amount of five million dollars, and permitted uses include changes of business ownership. The SBA guarantees a portion of the loan while a participating lender provides the funds.
- Seller financing. Many transactions include a seller note, meaning the seller receives part of the price over time rather than all in cash at closing.
Seller notes carry specific rules when an SBA 7(a) loan is involved. A seller note can help a buyer meet the required equity contribution only if it is placed on full standby, meaning the seller receives no principal or interest payments for the life of the SBA loan, which commonly runs ten years. Current guidance generally requires the buyer to inject a minimum cash equity contribution that cannot come from seller financing, with the seller note filling a limited additional slice of the structure. The precise percentages and standby terms are set by SBA policy and the participating lender, and they have changed over time, so the details of any given deal depend on the lender and the rules in effect at closing.
Certainty of close
Certainty of close, the likelihood that a signed deal actually funds, is a practical consideration with any buyer, and search funds have a distinct profile. Because acquisition equity is raised from a group of investors and much of the purchase is often debt financed, closing can depend on the searcher assembling committed capital and satisfying a lender's underwriting. Financing that relies on an SBA loan adds a formal approval process and its own eligibility conditions.
Several factors tend to bear on certainty in these transactions:
- Committed versus contingent capital. Whether investor equity is firmly committed at signing, or still being assembled, affects execution risk.
- Lender approval. SBA or conventional loan approval introduces underwriting timelines and conditions outside the buyer's direct control.
- Diligence depth. A first-time operator and cautious lenders often conduct thorough quality-of-earnings and legal review, which can lengthen the process.
- Financing contingencies. Purchase agreements frequently spell out what happens if financing does not come through, which is why the contract terms matter as much as the headline price.
None of this makes search-fund buyers more or less reliable as a category. Reliability varies by the individual searcher, the strength of the backing, and the specific deal structure.
Transition and legacy
Because the searcher personally intends to lead the company, transition dynamics differ from a sale to a strategic acquirer that may fold the business into a larger organization. The buyer generally plans to preserve the operation as a standalone company and to run it directly, which some owners view as favorable for employees, customers, and the local footprint. At the same time, the incoming operator is often newer to that specific industry, so a defined handover period, seller involvement during a transition, and retention of key managers commonly feature in these deals.
Legacy considerations that owners often examine include the buyer's stated plans for the workforce and brand, the expected length and structure of any transition or consulting arrangement, and whether the owner will retain a minority stake or provide seller financing that keeps them economically tied to the business after closing. Some owners value the fact that a searcher plans to keep the company independent and headquartered where it is, while others weigh the risk that a first-time operator may take time to learn the trade. These points are negotiated deal by deal, and the balance an individual owner strikes between price, structure, and the buyer's plans is a personal judgment shaped by the owner's own priorities.
Where this fits in a prepared sale process
Search funds are one buyer type among several, alongside strategic acquirers, private equity platforms, and independent sponsors, and a company can attract interest from more than one at once. Larger transactions are often handled through an organized investment banking process, while smaller companies are the core focus of the search-fund community. Preparing clean financials, a quality-of-earnings view, and organized diligence materials in advance can make a company easier for any of these buyers to evaluate, and platforms such as Bankerly organize that kind of sell-side preparation for lower-middle-market owners. The tax treatment of any deal, including seller notes, also warrants attention. When a seller receives payments after the year of sale, the IRS installment sale rules may allow gain to be reported as payments are received, with interest reported separately, though eligibility and mechanics depend on the facts. Those questions are properly worked through with qualified tax and legal advisors.
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Frequently asked questions
- What is a search fund buyer?
- A search fund is an investment vehicle through which a group of investors backs an individual entrepreneur, often called a searcher, to find, acquire, and personally run one privately held company. The Stanford Graduate School of Business traces the model to 1984. The defining trait is that the buyer intends to operate the business full time as its leader rather than hold it as one position in a diversified portfolio.
- How big are the companies search funds typically buy?
- Search funds concentrate on smaller companies than most institutional private equity. The 2024 Stanford Search Fund Study reported a median purchase price in the mid-teens of millions of dollars at roughly seven times EBITDA. Traditional searchers often target businesses with annual EBITDA in a general range of about two to five million dollars, frequently corresponding to prices in the low tens of millions.
- How do search funds finance an acquisition?
- Financing usually combines investor equity, senior debt, and often a seller note. For smaller deals, an SBA 7(a) loan is a common debt source; the Small Business Administration lists a maximum 7(a) loan of five million dollars, with permitted uses that include changes of business ownership. A seller note lets the seller receive part of the price over time rather than all in cash at closing.
- How does a seller note work with an SBA loan?
- When an SBA 7(a) loan funds the acquisition, a seller note can help the buyer meet the required equity contribution only if it is on full standby, meaning the seller receives no principal or interest during the SBA loan term, which commonly runs ten years. The buyer generally must inject a minimum cash contribution that cannot come from seller financing. Exact percentages depend on SBA policy and the lender.
- How are seller-note payments taxed for the seller?
- When a seller receives payments in years after the sale, the IRS installment sale rules may allow the gain to be reported as payments are received rather than all at once, with interest reported separately as ordinary income. Eligibility and mechanics depend on the specific facts, and Publication 537 covers the details. This is general information, not tax advice, and a qualified tax advisor should review any specific situation.
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