Search Funds: CES: Stanford GSB

Related Sites

Search Funds

Search Fund Primer

For those contemplating pursuing a search fund, or investing in one, the CES has created a practical guide to answer the most frequently asked questions. The Primer aims to provide an unbiased view of the benefits and challenges, explains the model from the entrepreneurs' and investors' perspective, and gives many operational and execution tips from previous search fund entrepreneurs.

Download the Primer

Search Fund Videos

Conceived in 1984, the search fund is an investment vehicle in which investors financially support an entrepreneur's efforts to locate, acquire, manage and grow a privately held company. The model offers relatively inexperienced professionals with limited capital resources a quick path to managing a company in which they have a meaningful ownership position.

Since 1996, the Center for Entrepreneurial Studies ("CES") at Stanford Graduate School of Business has conducted a series of studies on the performance of search funds (see links below). The CES has identified and tracked over 130 search funds raised since 1984, many of which have purchased companies successfully in the United States or United Kingdom. A 2009 CES analysis of 79 qualifying search funds found investor returns to be an average 37% IRR and 13.5x multiple of investment.

Go to the Search Fund Study 2009 [ PDF 207KB]
Go to the Search Fund Study 2007 [ PDF 101KB]
Go to the Search Fund Study 2005 [ PDF 144KB]
Go to the Search Fund Study 2003 [ PDF 96KB]
Go to the Search Fund Study 2001

Professor Irv Grousbeck, who helped conceive of the search fund and advises many of the entrepreneurs, expects that use of the search funds will continue to grow: "It's the most direct way I know for aspiring MBA entrepreneurs to get into business for themselves. And now that there are many experienced search-funders out there, those who have gone earlier are advising those who have come along more recently. Our objective is to have the search fund model grow, flourish, and be self-supporting, as one wave helps the wave behind it."

The search fund process consists of up to four stages: fundraising, search and acquisition, operation, and eventual event to provide shareholder liquidity.

Raising the Fund

In a search fund, capital is raised in two stages: (1) to fund the search ("search capital") and (2) to fund the acquisition of a company ("acquisition capital"). The search capital is used to pay the search fund principal(s) a modest salary and cover administrative and deal-related expenses over a two to three year period while he (they) search for an acquisition. Once a target acquisition is identified and negotiated, the search fund entrepreneur(s) raises the acquisition capital to purchase the company.

When raising the search capital, the search funder should strive to locate investors who can provide advice, counseling, creditability, and above all finances for the search and acquisition. A search fund is typically raised from 10 or more investors who each contribute $25,000-$40,000. In exchange for the initial search capital, each investors receives: (1) the right, but not obligation to invest pro-rata in the acquisition capital, and (2) conversion of the search capital, typically on a stepped-up basis (e.g. 150% of the actual investment) into the securities issued as the acquisition capital.

Finding a Company

The following criteria are likely to make a business attractive for acquisition:

Profitability.
Growth industry.
Predictable, stable, and recurring revenue.
High EBITDA margins.
Stable contractual relationships.
Simple and easy to understand.
Reasonable pricing.
Enough candidates in the industry available.
Financing available.
No overly dominant competitor or customer.
Limited landscape risk (including technology obsolescence, regulatory risk, legal risk, environmental risk, major cyclically, fads/trendy).
Low to medium technology product or service sectors, rather than the high-tech tech sector
Industry is profitable, not in decline, and attractive to creditors.
Growth potential via follow-on acquisitions, geographical expansion, and/or product/service extension.
Competent middle management willing to remain.
Long product/service life cycles that are not subject to rapid technological change or obsolesce, and that do not require substantial additional R&D.
Product/service differentiation exists or can be created.
Cash flow and assets sufficient to attract and service proposed debt.
Opportunity for liquidity in 4 to 6 years.
The opportunity to create superior returns through revenue growth, operational efficiencies, scale, financial leverage, and improved management techniques.

Center for Entrepreneurial Studies Search Fund Library Contents

Document: Entrepreneur's Corner: Search Funds 101, by Maria Parad, MBA1 [ PDF 19.4KB]
Document: Management Principals for MBA Search Fund/LBO Executives [ PDF 1.20MB]

Article: Seek and you will find, by Mike Southon, The Financial Times, May 22, 2011 (registration required)

Article: Finders, Keepers, by Thomas Zadvyas, The Deal Magazine, May 6, 2011

Article: Search Funds, A Financing Option for Business Buyers, by Gwen Moran, Entrepreneur Magazine, May 2011

Article: Business Opportunities Abound, Even in Bad Times, by Brent Bowers, The New York Times, February 2009
Article: Paying Entrepreneurs to Buy the Right Business, by Brent Bowers, The New York Times, March 2009
Article: An Alternative Source of Funding by Jonathan Moules, Financial Times, October 2009
Article: Looking for a Company To Run? Search Funds Could be the Answer in Knowlege@Whaton, March 2007
Article: Wanted: A Company to Call Their Own, by Meredith Alexander, Stanford Business magazine, August 2002
Article: You Gotta Have an Attitude, by H. Irving Grousbeck, Stanford Business magazine, March 1997

Center for Entrepreneurial Studies