Product Code Database
A search fund is an investment vehicle that enables an entrepreneur to raise capital from investors in order to search for, acquire, and personally operate an existing, privately held company. The model was developed in 1984 by Professor H. Irving Grousbeck at the Stanford Graduate School of Business.
Typically, the process involves two distinct rounds of financing. In the first stage, a small group of investors finances the "search," covering the entrepreneur's (or "searcher's") expenses and a modest salary for a period of up to two years. In the second stage, the searcher, upon the successful identification of their target company, returns to the initial investors and often other new investors to raise the significantly larger amount of acquisition capital required to complete the purchase. Following the acquisition, the searcher takes on the role of chief executive officer (CEO) of the acquired business, with the goal of growing the company and providing a return to investors and themselves.
While the traditional investor-backed model is most common, variations exist, including accelerator-led and self-funded searches.
Traditional search funds typically target companies in the $5 million to $50 million price range, requiring $2 million to $10 million of stock, in fragmented industries with sustainable market positions, histories of stable cash flows, and long-term opportunities for improvement and growth. Sel- funded search funds generally target businesses less than $5 million. Service and light manufacturing companies outside high-tech industries are popular targets. Often these companies are under-managed prior to the acquisition.
Most search funds are started by entrepreneurs with limited operational experience and possibly no direct experience in the target industry. The goal of the investor is to place promising, motivated managers in an environment with a high probability for success given the oversight and experience of the investors themselves.
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