> ## Content Index > Fetch the complete content index at: https://blog.financely.io/llms.txt > Use this file to discover other available public pages before exploring further. # How to Create a Search Fund: A Step-by-Step Guide - URL: https://blog.financely.io/how-to-create-a-search-fund/ - Published: 2026-09-18T13:31:37.000Z - Updated: 2026-09-18T13:31:37.000Z - Author: Financely Debt Advisors Buying a business is often faster than building one from scratch. **A** [**search fund**](https://blog.financely.io/search-fund-acquisition-financing/) **lets you** [**raise money**](https://blog.financely.io/traditional-searcher-financing-for-business-acquisitions/) **from investors so you can find, buy, and run an existing business instead of starting one from the ground up.** This path is called entrepreneurship through acquisition, or ETA, and it’s become a popular way for entrepreneurs to reach [business ownership](https://blog.financely.io/100-percent-business-acquisition-funding-how-to-acquire-a-business-with-no-out-of-pocket-money/). You don’t need a business idea to use this model. Instead, you need a plan to find the right company, convince investors to back you, and lead the business after you take over. This guide walks you through the steps of setting up a search fund. You’ll learn how to write your plan, raise capital, search for a business, and close the deal. ## Search Fund Models and the Right Path There are three main ways to structure a search for a business: the traditional search fund, the self-funded search, and the [independent sponsor](https://blog.financely.io/independent-sponsor-with-no-equity-what-to-do-instead/) model. Each one affects how much equity you keep, how much risk you take on, and how much support you receive along the way. ### Traditional Search Funds A traditional search fund is an investment vehicle where investors pay your search costs upfront. This covers your salary, travel, and other expenses while you look for a company to buy. In exchange, these investors get the first right to fund the acquisition once you find a target. They also receive equity in the business you eventually run. This model started in 1984 and grew through business schools such as Stanford University. Stanford GSB has tracked it closely, and its Search Fund Primer and Search Fund Study remain two of the most cited resources on the topic. Many searchers who choose this path are MBA graduates. They often don’t have enough personal capital to fund a search alone, so they rely on a group of investors from day one. ### Self-Funded Search Funds A self-funded search works differently. Instead of raising money before you begin, you use your savings or a small amount of outside funding to cover search costs. As a self-funded searcher, you take on more financial risk during the search phase. But you also keep more equity when you close a deal because you didn’t give any away for search capital. This path suits you if you have enough personal savings to support yourself through months of searching without a salary. It also gives you more control over deal terms since you aren’t tied to a fixed group of search investors. Self-funded search funds have grown in popularity because they offer more flexibility. You can [raise acquisition capital](https://blog.financely.io/capital-raising-for-independent-sponsors/) from any investor you choose once you find a company to buy. ### Independent Sponsor Structures An independent sponsor works without committed search capital or investor funding lined up in advance. You find a business first, then raise money deal by deal. That means you don’t receive a salary during the search. You cover your own costs and raise capital only after you have a signed letter of intent or a deal close in sight. This model gives you full control over each deal. It also creates more financial pressure, since you may go long stretches without income. Independent sponsors often work well for people with industry experience or existing investor relationships. If you already know people willing to fund good deals, this path can work without giving up early equity. ### Search Funds Versus Private Equity Search funds and private equity firms both buy companies, but the similarities mostly end there. A private equity fund pools money from many investors to buy multiple businesses across different industries. Private equity firms usually hire experienced managers to run each company after purchase. You, as a search fund operator, have a different role. You personally run the business you acquire, often for many years. Here’s a quick comparison: | Feature | Search Fund | Private Equity | | -------------------- | -------------------- | ------------------------- | | Number of companies | One | Many | | Operator role | You run the business | Hired management team | | Investment size | Smaller, single deal | Larger, diversified fund | | Investor involvement | Direct, hands-on | Indirect, portfolio-based | If you want direct control over one business and a long-term operating role, a search fund fits better than joining a private equity fund. ## Prepare the Searcher Profile and Acquisition Thesis Before you raise money or contact a single seller, you need to know who you are as an operator and what type of business you want to run. Be honest about your operational experience, then write down clear rules for the target companies you’ll pursue. ### Assessing Operating Readiness Investors want to know that you can run a company, not just find one. Be candid about your background as a CEO, COO, or CFO, and point to specific results you drove in past roles. Think about the gaps in your skill set. If you’ve never managed a P&L directly, say so and explain how you plan to close that gap. Search fund entrepreneurs come from many backgrounds, including consulting, [finance](https://blog.financely.io/business-acquisition-finance/), and operations. What matters most is evidence that you can lead a team and make difficult decisions under pressure. Ask yourself these questions: - Have you managed people, budgets, or both? - Can you point to a time when you improved profitability at a company? - Do you understand basic financial statements, including cash flow and EBITDA? Your answers shape how investors view your [fit as an acquisition entrepreneur](https://blog.financely.io/buyer-pre-qualification-for-a-business-acquisition/). ### Defining Target Business Criteria Write down clear rules for what counts as a target business before you begin searching. This keeps you from wasting time on deals that don’t fit. Most acquisition targets in this space are small businesses with [$1 million to $5 million in EBITDA](https://blog.financely.io/acquisition-financing-for-a-1m-ebitda-business/). Many searchers focus on B2B companies because they tend to have more predictable revenue and clearer customer relationships than consumer-facing firms. Set specific filters, such as: | Criteria | Typical Range | | ------------- | ------------------------------------- | | EBITDA | $1M–$5M | | Revenue | $5M–$30M | | Industry | B2B services or niche manufacturing | | Customer base | Diversified, low concentration risk | | Revenue type | Recurring or contract-based preferred | Recurring revenue matters because it signals stability. A target company with long-term contracts or subscription-based income is easier to value and finance. ### Building a Business Plan and Market View Your business plan should explain why you’re the right person to buy and run a company in your chosen space. This document supports your [acquisition thesis](https://blog.financely.io/how-to-build-an-acquisition-model-for-a-business-purchase/) and gives investors a reason to back you. Include your view on market share, growth potential, and how you plan to improve profit after taking over. Back these claims with real numbers, not guesses. Market research plays a central role here. Review industry reports, talk to [business owners](https://blog.financely.io/private-credit-founder-owned-businesses/), and study competitors in your target sector. A strong plan should cover: 1. **Industry overview** — size, growth rate, and key trends 2. **Competitive landscape** — who holds market share and why 3. **Value creation plan** — specific steps to grow revenue and cash flow after acquisition 4. **Risk factors** — what could go wrong and how you'll respond This plan becomes the foundation for your conversations with investors and sellers. ## Build the Fund Structure and Raise Search Capital You need a legal entity, a clear set of investor materials, and a plan for reaching the right backers. Getting these three pieces right helps set the pace for your search fund financing process. ### Selecting an Entity and Advisory Team Most search funds form as an LLC. This structure protects your personal assets and gives you flexibility in splitting equity among investors. Once you choose your entity, apply for an EIN through the IRS. You’ll need this number to open a bank account, sign contracts, and pay early expenses. Speak with an attorney early in the process. A lawyer who has worked with search funds can help you avoid securities law and investor agreement mistakes. They’ll also draft your operating agreement and review your PPM before you send it to investors. Pick a bank next. Many searchers use a business bank like Chase to manage search capital and keep records clean for investors and the IRS. ### Preparing the Investor Materials Your private placement memorandum, or PPM, is the main document investors will read. It should explain your background, industry focus, and plan for using the initial capital. Include these details in your PPM: - **Search timeline** – how long you expect to search before buying a business - **Budget** – salary, travel, and due diligence costs - **Equity terms** – what investors get in exchange for search capital - **Step-up rights** – how search capital converts into acquisition equity Keep the language clear and direct. Investors read plenty of these documents, so a well-organized PPM stands out. Your attorney should review every draft before you share it outside your close circle. ### Approaching and Closing Investors Search fund investors usually fall into a few groups: family offices, individual angel investors, and sometimes smaller venture capital firms that understand the model. Family offices often like this structure because it gives them direct exposure to one business and an operator they can get to know personally. Reach out to your network first. Many searchers find that former colleagues, professors, or people they’ve worked with provide their first checks. Think about debt and equity as you structure the raise, even at this early stage. Some investors prefer a note that converts later, while others want straight equity from day one. Track every investor as a limited partner, or LP, in your fund. Keep clear records of who has committed, how much they’ve promised, and when funds are due. This makes closing smoother and keeps your cap table accurate as you move toward your target raise. ## Run a Disciplined Search Process The search phase sits at the center of your acquisition strategy. It combines proprietary outreach, broker relationships, and a clear [screening process](https://blog.financely.io/how-lenders-evaluate-deals/) to help you find and close on the right target company. ### Creating a Proprietary Deal-Sourcing System Proprietary deal sourcing means finding acquisition targets before they reach the open market. This gives you less competition and often better pricing. Start by defining your search criteria, including industry, revenue size, location, and owner profile. Then build a list of target businesses that match those criteria. Reach out directly through cold email, phone calls, or direct mail. Track every contact in a CRM system so you can manage your pipeline and follow up at the right time. Tools like Searchfunder can help you connect with other searchers and access deal-sourcing resources. Consistency matters most here. Plan to contact dozens of businesses each week to keep your pipeline full. ### Working With Brokers and Business Owners Business brokers control a large share of small business sales. Building relationships with them gives you access to deals you might not find on your own. Reach out to brokers in your target industries and regions. Explain your acquisition process clearly and show that you’re a [serious, funded buyer](https://blog.financely.io/how-to-secure-a-lender-letter-before-buying-a-business/). Brokers want buyers who move quickly and don’t waste their time. Respond promptly to listings and come prepared with basic financial questions. When talking with business owners directly, focus on listening first. - Ask about their goals for the sale - Understand their timeline - Learn what matters most to them beyond price Many owners care about their legacy and employees. Showing genuine interest in those details can set you apart from other buyers. ### Screening Opportunities and Making an LOI Not every deal that crosses your desk deserves attention. A strong screening process saves time and protects you from bad acquisitions. Start with a quick review of [financials](https://blog.financely.io/lender-document-checklist-business-acquisition/), industry trends, and owner motivation. Reject deals early if they don’t meet your core criteria. For deals that pass the first check, dig deeper. Review: - Three to five years of [financial statements](https://blog.financely.io/how-lenders-underwrite-business-acquisitions-2/) - Customer concentration - Employee structure - Growth potential Once you’ve confirmed real interest, write a letter of intent (LOI). This document outlines your proposed price, deal structure, and key terms. The LOI isn’t final, but it signals serious intent and moves you toward [due diligence](https://blog.financely.io/private-credit-lender-due-diligence-process/). Keep it clear and specific to avoid confusion later in the process. ## Evaluate, Finance, and Close the Acquisition Once you find a target company, you enter the final and most demanding part of the acquisition phase. You need to confirm that the business is what it claims to be, agree on a fair [purchase price](https://blog.financely.io/acquisition-finance-for-sponsors-with-purchase-agreements/), and assemble the debt and equity needed to fund the deal. ### Conducting Commercial, Financial, and Legal Due Diligence Due diligence protects you from buying a business with hidden problems. Look closely at revenue trends, customer concentration, and EBITDA to see whether profitability is real and repeatable. Financial due diligence checks the accuracy of the numbers you received. A quality of earnings report shows whether cash flow matches what's on paper. Commercial due diligence examines the market, competitors, and customer relationships. Legal due diligence covers contracts, licenses, and pending lawsuits. You should hire outside experts for this work. An **attorney** will review contracts and flag legal risks, while an accountant will check the books. Skipping this step, or rushing through it, is one of the most common reasons search fund deals fail after closing. ### Valuing the Business and Negotiating Terms Valuing a target company starts with its EBITDA. You then apply a multiple based on industry norms and business risk. This gives you the enterprise value, which serves as the basis for your purchase price before adjustments for debt and cash. Most small to mid-sized businesses in a search fund acquisition trade for 3 to 6 times EBITDA. Companies with steady revenue, low customer concentration, and strong margins usually command higher multiples. Negotiation covers more than price. You should also agree on: - **Working capital targets** at closing - **Earnout terms** tied to future performance - **Non-compete agreements** for the seller - **Transition support** from the outgoing owner Your goal is a deal structure that protects you if performance dips after closing while still giving the seller a fair deal. ### Structuring Debt, Equity, and Seller Financing Most search fund deals combine three types of acquisition capital: debt financing, [equity investors](https://blog.financely.io/business-acquisition-financing-with-an-equity-contribution/), and [seller financing](https://blog.financely.io/equity-gap-financing-for-acquisitions-with-seller-financing/). This mix lowers your personal risk and gives investors more confidence in the deal. A typical capital stack might look like this: | Source | Typical Share of Deal | | ---------------------------------------------------------------------------------------------------- | --------------------- | | [Senior debt](https://blog.financely.io/debt-financing-for-business-acquisition/) (bank or SBA loan) | 40–60% | | Equity investors | 25–40% | | Seller financing | 10–20% | Debt and equity terms depend on the lender and the strength of the business's cash flow. With seller financing, the seller accepts part of the payment over time. It can bridge funding gaps and demonstrate the [seller's confidence](https://blog.financely.io/business-acquisition-financing-for-sponsors-with-seller-diligence/) in the business. Your attorney should review every financing document before you sign. Loan covenants and equity agreements will shape how you run the company after close. ## Lead the Acquired Company and Create Value Buying the company is only the first step. Your job now is to run it well, build trust with the team, and grow profit and [cash flow](https://blog.financely.io/how-to-find-cash-leaks-in-a-growing-business/) over time. ### Managing the Ownership Transition The first weeks as the new CEO set the tone for your entire time as owner. Employees and customers will watch how you handle the change. Meet with the outgoing owner before the handoff is complete. Ask about key customer relationships, vendor contracts, and problems that aren't written down anywhere. Then meet with staff one-on-one during your first week. Keep changes small at first. Sudden shifts in pay, benefits, or daily routines can scare good employees away just when you need them most. Show the team that you respect what they built while you learn how the business really works. ### Prioritizing the First 100 Days Your first 100 days should focus on learning, not changing. Spend time with every department before making big decisions. Focus on these areas: - **Customer relationships** – Call your top 10-20 customers to understand why they buy and what could make them leave. - **Financial systems** – Review cash flow, recurring revenue, and [profit margins](https://blog.financely.io/how-to-prepare-financials-before-selling-a-company/) to confirm what you learned during diligence. - **Team structure** – Identify who actually runs daily operations, even if it's not who you expected. - **Quick wins** – Find one or two small operational improvements you can make fast to build credibility. Avoid major layoffs or reorganizations during this window. Save larger post-acquisition strategy changes until you understand how the business makes money. ### Planning Growth and Investor Returns Once you understand the business, shift toward growth. Search fund investors expect you to increase profit and cash flow steadily, not overnight. Look for ways to raise market share within your current customer base first. This often costs less than chasing new customers. Add-on acquisitions can also speed up growth by letting you buy smaller competitors or suppliers and expand faster than you could alone. Track your progress against the return goals investors set when they backed you. Most search fund investors expect a strong internal rate of return. Stanford's research shows that successful search fund deals have historically returned an average IRR near 34%, though results vary widely by deal. Plan your [exit strategy](https://blog.financely.io/10-ways-a-fractional-cfo-prepares-a-company-for-sale/) early, even if you won't act on it for years. Knowing whether you'll sell to a larger company, another private equity buyer, or pursue a public offering shapes how you build the business today. ## Frequently Asked Questions Search funds follow a clear path from raising money to buying a company and running it for years afterward. Here are answers to the most common questions about the process. ### What are the key steps to launching a search fund? You start by writing an investment thesis. This document explains what type of company you want to buy and why. Next, you raise search capital from investors. This money pays your salary and covers costs such as travel and legal fees while you look for a business to buy. Then you spend up to two years searching for the right company. Once you find one, you negotiate the deal and raise more capital to [fund the purchase](https://blog.financely.io/acquisition-financing-for-a-traditional-searcher/). After you close the deal, you step in as CEO. You typically run the company for five to seven years before selling it or moving on. ### How do search fund founders raise capital from investors? You raise money in two separate rounds. The first covers your search costs and usually comes from a [small group of investors](https://blog.financely.io/financing-a-business-acquisition-with-an-investor-syndicate/) who buy units in your fund. The [second round](https://blog.financely.io/how-traditional-searchers-finance-acquisitions/) happens once you find a company to buy. You return to your investors, and sometimes bring in new ones, to raise the full purchase price plus working capital. Most search funds use a private placement memorandum, or PPM, to explain the [deal terms](https://blog.financely.io/conventional-acquisition-financing-for-searchers/) to investors. This document lays out your background, your search plan, and how investors will get paid back. ### What qualifications and experience do investors look for in a search fund entrepreneur? Investors want to see some business or finance experience before they back you. This might come from consulting, banking, or working inside a company. An MBA is not required, but many searchers have one. Investors value it because business school often teaches skills that map well to running a search, including financial analysis and deal structuring. Beyond your resume, investors look at your judgment and work ethic. They want someone who can make smart decisions independently and push through a search that may take many months. ### How do search funds generate returns for founders and investors? Investors earn returns when the company you buy grows in value and gets sold. Your investors receive their capital back first, along with a preferred return, before profits get split further. As the founder, you typically earn a small salary during the search phase. Once you buy a company, your pay often includes a base salary and equity in the business. Your equity stake usually grows over time based on performance. This structure aligns your incentives with those of your investors, since you both benefit when the company does well. ### What types of companies are best suited for a search fund acquisition? Search funds tend to target small, stable companies with [steady cash flow](https://blog.financely.io/structured-debt-for-sponsors-buying-cashflowing-businesses/). These businesses often have $2 million to $20 million in annual revenue. Good candidates usually have a strong customer base and predictable earnings. Companies with too much debt or unclear finances create greater risks and are less appealing. Many search fund buyers look for owners who are ready to retire and sell. This often means the business needs new leadership, giving you room to step in and run it. ### How does a search fund differ from traditional private equity? A private equity firm usually buys multiple companies over time with one large fund. A search fund raises money to buy a single company, which you then run yourself. In private equity, professional managers often remain in place after the deal closes. With a search fund, you become the CEO and take direct responsibility for daily operations. Search funds also involve smaller deals than most private equity transactions. That makes them a common option for someone without a large network or a substantial pool of capital to draw on.