A Small Business Owner’s Guide to Selling to a Search Fund

If you’re exploring the idea of selling your small business, there’s a good chance you’ve heard about private equity firms, strategic buyers, and individual purchasers. But one type of buyer that often flies under the radar is the search fund. Search funds are unique investment vehicles designed specifically to acquire and run a single business. Typically formed by a motivated entrepreneur (or a pair of entrepreneurs) backed by a group of investors, search funds focus on smaller companies where the owner may be looking to exit or transition.

Selling to a search fund can offer a highly personalized and collaborative approach. But is it right for you?

In this article, you will learn how to:

• Understand what a search fund buyer is and how it differs from other buyers

• Evaluate the pros and cons of a search fund acquisition

• Prepare for the search fund’s criteria and process

• Navigate deal structures and plan for a successful transition

What Is a Search Fund Buyer?

A search fund is formed by one or two entrepreneurs who raise initial capital from investors (often experienced operators, executives, or former CEOs) to find and purchase a single business to manage. Unlike private equity firms that manage multiple companies, or strategic acquirers expanding existing operations, a search fund buyer is typically seeking a stable, profitable small business to own and grow long-term. This often results in a hands-on, committed owner-operator relationship, where the search entrepreneur will step into your role and continue your legacy.

Are You Ready to Consider a Search Fund?

Personal and Financial Considerations

Before exploring a search fund deal, consider your long-term goals:

• Transition involvement: Are you ready to step away, or do you want to help guide the next owner through a transition period? Search fund buyers often value the seller’s input during the handover.

• Values and legacy: Many sellers appreciate that a search fund entrepreneur is buying not just to flip the business but to run it and maintain its culture. If preserving your company’s legacy matters, a search fund might be an ideal partner.

• Financial targets: Like any sale, ensure the valuation and deal structure align with your financial objectives.

Market Timing

Search funds operate across various industries, often looking for stable companies that have not yet caught the eye of larger investors. The best time to sell to a search fund may be when:

• Stable revenue and profit trends are in place, showcasing a predictable business model.

• No pressing industry shifts are threatening your business’s core operations.

• You have clarity in operations, making it easier for a new entrepreneur to step in confidently.

Quick Tip: Search fund entrepreneurs generally look for businesses they can run personally for 5-10 years. This means timing matters less about market cycles and more about your readiness and business maturity.

Weighing Search Funds vs. Other Types of Buyers

Each type of buyer has unique priorities and resources. Understanding how a search fund compares can help you determine if they’re the right fit.

Common Buyer Types

Search Funds: Pros and Cons

Pros

Cons

Quick Tip: Communication and rapport matter. With a search fund, you’re often dealing directly with the future operator of your business. Trust and personal fit can weigh heavily in your decision.

What Search Funds Look For

A search fund entrepreneur typically focuses on “boring but beautiful” companies—stable, profitable businesses with opportunities for steady growth. Key factors include:

• Consistent earnings: Strong cash flow and reliable recurring revenue streams.

• Manageable size: Often businesses with EBITDA in the $1-3 million range, suitable for an entrepreneur stepping in as a full-time operator.

• Stable operations: Documented processes, established customer relationships, and less dependency on the owner’s day-to-day involvement.

• Growth potential: While not requiring hyper-growth, a search fund buyer looks for ways to enhance efficiency, introduce new products, or expand into adjacent markets.

Valuation Considerations

Search funds generally apply standard earnings-based business valuation methods, similar to many buyers. However, they may place additional value on:

• Owner Independence: The less reliant the business is on you, the more attractive it is to a search fund entrepreneur.

• Operational Clarity: Clean financial records, detailed SOPs, and stable employee teams reassure a new owner stepping into your shoes.

Real Example: Owner Dependence

If your business heavily relies on your personal network or technical expertise, a search fund buyer may discount their offer until you can prove that knowledge is transferable and processes are well documented. If you’ve already built a strong management team and replicable systems, expect a higher valuation.

Structuring a Deal with a Search Fund

Equity Rollovers and Seller Notes

Search fund transactions can be flexible. While you might sell a majority stake, the buyer could ask you to consider:

• Seller financing: Accepting a portion of the payment over time, which can help the buyer manage initial capital requirements while providing you with steady income.

• Earn-outs: Linking a portion of the price to hitting future milestones—ensuring both parties remain committed to the business’s long-term success.

Transition Involvement

Expect to spend some time mentoring the new owner. Your insights into customers, operations, and industry subtleties can make or break the success of the transition. Many sellers find satisfaction in guiding the next generation, ensuring the values and culture they built carry forward.

Quick Tip: Be open to a collaborative deal structure. A search fund buyer may rely more on creative financing and long-term arrangements, which can offer both stability and upside potential for you.

Navigating Due Diligence and Closing

What to Expect in Due Diligence

Search fund buyers, backed by their investors, still conduct thorough due diligence:

• Financial review: Past 3-5 years of tax returns, profit & loss statements, and balance sheets.

• Operational checks: Customer contracts, vendor terms, and documented processes that ensure continuity post-ownership transfer.

• Cultural fit: An intangible but vital aspect. The buyer wants to confirm that they can preserve the company’s core values and relationships.

Quick Tip: Get ahead of the game by organizing financial records, contracts, and operational manuals. Show the new owner that the business runs smoothly without your constant involvement.

Closing the Deal

Once due diligence is complete, you’ll work together to finalize the purchase agreement. A well-defined transition plan and ongoing advisory role can make everyone more comfortable with the change in ownership.

Quick Tip: Professional advisors—M&A attorneys, CPAs, and experienced consultants—can help you navigate the process, ensuring that both you and the buyer achieve a fair outcome.

Life After Selling to a Search Fund

Your Role Post-Sale

Expect a structured handover. Depending on your agreement, you may remain involved for 3-12 months to train the new owner, introduce them to key clients, and ensure a smooth operational handoff.

The Buyer’s Vision

A search fund entrepreneur is likely to invest time and energy into gradually improving and growing the business. Changes may happen at a more measured pace compared to private equity buyers who may implement rapid strategies. This can lead to a more stable and familiar environment for employees and customers.

Looking Ahead

If you’ve structured the deal with some ongoing financial interest—through an earnout or note—you may continue to benefit as the company grows. Alternatively, if you’ve taken a clean exit, you can enjoy the peace of mind that comes from knowing your business is in the hands of someone personally invested in its future.

Summary

1. Assess your readiness: Determine if you value legacy, personal rapport, and a smoother handover—traits well-matched with a search fund buyer.

2. Compare buyer types: Weigh the long-term commitment and personal touch of a search fund against other buyer types like private equity firms or strategic acquirers.

3. Prepare for their criteria: Have stable financials, clear processes, and a capable team in place to maximize attractiveness and valuation.

4. Negotiate deal structure: Consider earn-outs, seller notes, and advisory roles. Flexibility and collaboration often define search fund deals.

5. Streamline due diligence: Present well-documented finances, contracts, and operations to build buyer confidence.

6. Guide the transition: Offer your experience to help the new owner succeed, ensuring your company’s legacy endures.

Next Steps

Still uncertain about a search fund sale? Each situation is unique. Whether you’re just exploring your options or ready to engage with potential buyers, we’re here to help guide your journey.

Schedule a free confidential consultation to:

• Understand how search funds might value your business

• Learn about the current demand and financing environment in your industry

• Get expert advice on deal structure and timing

OffDeal leverages advanced technology and expertise to help small business owners achieve the same quality of M&A service previously reserved for large corporations. Our mission is to ensure every business owner has the opportunity to maximize their value when they're ready to sell.