Search fund

A search fund is an investment vehicle where an entrepreneur (searcher) raises capital from investors to find, acquire, and operate an SME over a 24- to 36-month period. Investors fund the search phase; upon identifying a target and closing the acquisition, they contribute additional capital for the purchase and the searcher assumes operational leadership. The model originated in the U.S. and is reaching Mexico with buyers seeking stable businesses, recurring cash flow, and growth potential under new leadership. For SME sellers, a search fund represents an alternative buyer to private equity, strategic competitor, or family succession.

How does a search fund work?

A search fund cycle follows these stages:

1. Search capital raise: The searcher obtains investor funding to cover salary and search expenses for 24–36 months.
2. Active search: Identifies targets, contacts sellers, signs NDA, evaluates companies against predefined criteria.
3. Investor presentation: Selected target is presented to the investment committee for approval.
4. Acquisition: Acquisition capital is raised, LOI negotiated, due diligence executed, and deal closed.
5. Operation: Searcher assumes leadership; investors participate in equity and return at exit in 5–7 years.

What does a searcher look for in an SME?

• Recurring revenue: Predictable cash flow, low extreme seasonality, long-term customer contracts or relationships.
• Positive EBITDA: Demonstrable operating profit; base for EBITDA multiple in valuation.
• Low founder dependence: Delegable operation or agreed transition plan with seller.
• Understandable sector: B2B services, distribution, light manufacturing — avoiding biotech, crypto, highly regulated sectors.
• Growth potential: Expansion opportunities under new leadership without capital-intensive requirements.

Typical ranges in Mexico: revenue USD 2–15 million, EBITDA USD 500,000–3 million. Targets outside range receive less interest from active searchers.

How does it compare to a private equity fund?

What do sellers ask about search funds?

How does a search fund work step by step?

The searcher raises search capital from investors to fund 24–36 months of searching. They identify targets, sign NDAs, evaluate companies, and present opportunities to investors. Upon finding an approved target, they raise acquisition capital (equity plus debt if applicable), negotiate LOI, and close. The searcher becomes CEO; investors participate in equity and return when selling or recapitalizing in 5–7 years.

What SME profile does a search fund target?

Businesses with stable recurring revenue, positive and predictable EBITDA, low technical dependence on the founder (or with a transition plan), understandable sector, and growth potential under new leadership. Typical ranges: revenue USD 2–15 million, EBITDA USD 500,000–3 million. They avoid turnarounds, highly regulated sectors, and businesses highly dependent on the founder without a succession plan.

How does a search fund differ from a private equity fund?

A search fund is led by an individual entrepreneur (searcher) who operates the acquired company; PE is led by an institutional fund with an investment team and portfolio of multiple companies. A search fund acquires one company per search vehicle; PE acquires several. Search funds target smaller deals (lower mid-market); PE operates at higher ranges. For the seller, a search fund offers continuity with a long-term committed operator.

What does selling to a search fund mean for an SME owner?

Process similar to sale to a financial buyer: NDA, CIM, due diligence, LOI, closing. The searcher may request a founder transition period (3–12 months) to transfer key relationships and operations. Consideration structure includes cash at closing, seller note, and sometimes earn-out. The seller negotiates with a future operator, not a fund that will delegate management to an external team from day one.