Search Funds: Creating A Whole New Generation of Entrepreneurs

By Heather Endresen

Takeaway: New entrepreneurs are flocking to the previously obscure search fund model in droves.

No generation has had the impact on small business creation that the baby boomers have had over the past 50 years. As they look to retire, a new model of entrepreneurship is emerging and these new entrepreneurs are flocking to the previously obscure search fund model in droves.

To paint you a picture of the current small business landscape, during 2017, 36% of small business owners—those with $100,000 to $10 million in sales—said they plan to transition the ownership of their company in the next five years. With 8.6 million small businesses in the U.S., that could equate to more than three million businesses going up for sale in some manner (liquidate, sell to third party, sell to family, sell to employees or sell stock to public). This, combined with current taxes, financial performance and attractive multiples, shows the conditions for acquisitions are opportune.

The Next Generation

A new generation of young entrepreneurial talent is emerging, and they are ready to manage and continue to grow these businesses. The phenomenon is occurring in elite business schools across the country.  In an interesting shift, many of these young MBA graduates are opting to be CEOs on Main Street instead of Wall Street by acquiring their own businesses.

Many are turning to the search fund model, and this process known as entrepreneurship through acquisition (ETA) is gaining traction globally. The amount of search funds has increased a whopping 428% over the last five years, increasing at a rate of about 40% per year, according to

Mark Yuan, co-founder and CTO of, says, “There is market pressure. We are in a time of record high asset prices. There is a ton of dry powder—un-deployed capital sitting on the sidelines committed to general partners at various asset management firms—that have too few deals to chase. Only smaller deals, less than $20 million, remain attractive and uncompetitive; however, these deals do not usually make sense for the cost structures of traditional private equity firms. Search funds are able to access these companies because searcher salaries are low compared to private equity and outcomes do not have to be in the hundreds of millions to make the deal a success.”

Seeking Funding

There are three types of search funds—traditional, self-funded and single sponsor (also known as fund-less sponsors).

With traditional funds, searchers raise capital from a group of investors to look for a company within a certain geographical area. These investors have the right of first refusal on any deals, according to

“Traditional search funds are backed by about 200 investors in the country who have been doing this for 30 years—serial search fund investors. Those are backed by that cadre of investors and have certain stipulations,” explains David Slenzak, of Broadtree Partners, a search fund accelerator.

Self-funded searchers finance their own search efforts. Once they find a deal, they look for outside capital. The terms are negotiated on a deal-by-deal basis, according to Many acquirers are able to access SBA loans. Since this type of loan has flexible terms, SBA loans are often the preferred financing vehicle for acquiring a business. At Live Oak Bank, the nation’s leading SBA lender currently, there is a dedicated SBA M&A lending unit to cater to the growing demand for these loans.

“Self-funded searchers are younger people—aged 28 to 38—doing this for the first time, that are not using a cadre of seasoned investors to back them. They’re trying to do this with their own money—or maybe they’ve got one or two investors—and they rely heavily on SBA funding,” says Slenzak.

Single-sponsor or fund-less sponsors raise search capital from a single source rather than from a group of investors, sometimes even co-locating with their investor, according to

“Fund-less sponsors are self-funded; they’re just more seasoned. They know how to structure deals, and people will back them based on their prior track record,” says Slenzak.

Back to School

As the segment booms, more ETA programs are being created at business schools around the world. The programs teach students exactly how to go about searching for a good business to buy, how to raise debt and equity capital, how to transition into ownership, and ultimately grow the company into something bigger and stronger than before.

One of these programs was founded by Royce Yudkoff, professor of management practice at Harvard Business School (HBS) along with Richard Ruback, professor of corporate finance at HBS, a decade ago. The two have since co-authored the book, HBR Guide to Buying a Small Business.

Yudkoff says the program has grown enormously over the last five years. He sees a few reoccurring characteristics in these students: “One, they really want to exercise leadership early in their careers; they don’t want to wait 10 or 15 years before they get real general management responsibility inside a large company—they want that experience sooner. Two, they want a direct link between their work and their reward. Three, they want the professional independence of not having a boss. Certainly, they answer to their customers, their employees, their regulators and their investors—but it’s all different from having a boss.”

He says it takes a special person to buy these businesses. “The person needs to be capable of doing two things. One is they have to have the training and skills to run a small firm, but they also have to know how to raise capital and organize an acquisition transaction. Having those two skills together is pretty rare.”

Yudkoff attributes the growing interest in the program to increased awareness, the number of small companies coming up for sale, and the fact that careers in large companies seem less secure or predictable than they were 20 years ago.

All Types

There are typically two types of searchers, Karen Spencer, COO of says—one who is geographically-focused and one who is more portable. The geographically-focused searcher is looking for a business in one area, regardless of what that business is. “Say the person lives in the Dallas area, and for family reasons, can’t move from Dallas or is reluctant to do that. That searcher will be pretty open about what industry they’re looking at. Then you might know somebody who is more portable, so they can look all over the U.S.—that person might be more focused on a specific set of industries. They might want an ambulance company, and they’re willing to look all over the U.S. for that company.”

In addition to young grads, there are other searchers flocking to the funds, and Slenzak predicts that will increase. “An interesting trend to talk about is that the interest in search funds has expanded significantly, but the number of fund-less sponsors has even outpaced that, and I think that’s a huge, meaningful trend.”

That is a result of the boom in the private equity asset class. “What you see in fund-less sponsors are a lot of younger private equity fund managers that are leaving funds and doing it on their own, or investment banker types that are leaving and doing it on their own. I think a couple of factors drive that. One, as the private equity asset class increased, these expats have also increased. And as capital availability has increased, the likelihood of executing that strategy has gone up, and a lot of people are able to leave private equity funds and investment banks and do it on their own,” says Slenzak.

He believes that not only will this upward trend continue but will surpass the growth of the other two types of search funds. “I think that it’s going to increase and probably outstrip the increase in search funds.” There are just more people in that category. “If you have each bucket increasing at say, 30 percent in a year, that big bucket is going to increase faster,” he says.

“One other reason for that is the capital availability is so prevalent, and raising a fund has so many regulatory constraints, that people just find it in some ways more attractive to just become a fund-less sponsor than to raise a private equity fund,” Slenzak says.

You may ask which industries are of the most interest? Yuan says, “Software and healthcare are the hottest right now in the U.S. Manufacturing and other business services are a staple for search funds around the world. Searchers tend to focus on businesses services rather than consumer and retail.”

While the phenomenon is global, some areas are seeing especially high growth. “The biggest growth regions are U.S., Brazil, Spain and England,” Yuan says. “Asia remains relatively untapped.”

Onward and Upward

Many in the industry agree that this is a trend that will continue to boom.

“I believe the timing is right. We have more schools building awareness about it, and I think that the model gets easier as more baby boomers retire out of their businesses. I think the trend will continue,” says Spencer.

Yudkoff agrees that it will continue, though he says what’s driving it now is probably different from what’s driven it to here. “What’s driven it to here is greater awareness and availability of information through these courses, and second, the forces in the economy which make this path attractive relative to the alternatives,” he says. Moving forward, “I think the biggest force is that business school students are seeing their predecessors doing this in large numbers, and it’s working out for them on average. And so it’s becoming a sensible alternative.”

Globally, there is certainly room to grow. “There are huge untapped geographies such as Asia and Australia,” says Yuan. “Also, searchers currently make up a tiny portion of total available deals. The bottleneck is on mentorship and people who are CEO material. As more mentors and business school programs mature to train the next generation of searchers, it may very well become a career of choice for MBAs.”

There is also money out there to support the growth. Slenzak says, “I think this model is just showing up on the radar of a lot of big money sources, and I think over the next two to five years, we’ll see a lot of money trying to get into this space. There’s a lot of capital out there, and people will be looking for a model to put capital to work in this sort of micro-cap asset class. I think that people will look to this model to put money to work at this asset class and generate returns that have been so successful in years past.”

He adds, “As private equity returns diminish, they’re going to look to try to get higher returns in this micro-cap space, and they’ll look to this model to try to capture that.”

Heather Endresen is a senior loan officer on Live Oak’s M&A lending team. Reach her at[email protected] or 714.404.3648.