1. Search Funds and the Need for Faster, Smarter Due Diligence
Over the last decade, search funds have grown from a niche model pioneered at Stanford Business School in the 1980s into a mainstream path for entrepreneurship through acquisition (ETA). They’ve attracted billions in capital and become an increasingly important player in the small business M&A ecosystem.
But while search funds bring ambition, capital, and a disciplined investment thesis, their success often hinges on one factor: the ability to conduct fast, informed, and cost-efficient due diligence.
2. What Is a Search Fund?
A search fund is an investment vehicle where one or two entrepreneurs (often recent MBAs) raise capital to search for, acquire, and operate a single business. Instead of starting a company from scratch, the searcher becomes the CEO of an established business, usually with revenues between $5M–$50M.
Search funds are appealing because they blend entrepreneurship with private equity. This gives operators the chance to run a business with investor backing, while offering investors attractive, often outsized returns.
3. Types of Search Funds
- Traditional Search Funds
- A small group of investors provides initial funding to cover the searcher’s salary and expenses for 1–2 years.
- Once the searcher identifies a target, the same investors (and sometimes additional ones) fund the acquisition.t
- Self-Funded Search Funds
- Once the searcher identifies a target, the same investors (and sometimes additional ones) fund the acquisition.
- They retain more equity but take on more risk and must be disciplined about diligence and deal costs.
- Incubated or Accelerated Search Funds
- Affiliated with organizations or firms that provide structured support, resources, and sometimes capital.
- Examples include search fund accelerators and ETA-focused investment firms.
- Sponsored Search Funds
- Backed by a single institutional investor or family office that provides both search capital and acquisition funding.
- Searchers give up more ownership but gain stability and strategic support.
4. How Search Funds Invest
Searchers typically target businesses with:
- Stable cash flows and recurring revenue.
- Strong margins and growth potential.
- Retiring founder or fragmented ownership structure.
- Industries that are resilient, non-cyclical, and often overlooked by larger private equity firms (think healthcare services, B2B software, niche manufacturing, or essential services).
Once a target is identified, investors move quickly: capital is lined up, diligence must be thorough, and sellers are often evaluating multiple offers.
5. Why Due Diligence Is Mission-Critical
For search funds, diligence is the single most critical step between a promising target and a career-defining investment. Three reasons stand out:
- Time Sensitivity
- Searchers typically operate on a 24-month clock to find and acquire a business. Every week lost in diligence shortens their runway.
- Sellers, especially founder-owners, expect a smooth process. Delays can kill deals.
- Resource Constraints
- Unlike large private equity firms, search funds don’t have the budget to hire multiple consulting teams. Diligence needs to be both cost-effective and high-quality.
- Risk of a Single Bet
- Most searchers only acquire one company in their career. Missing a red flag in diligence isn’t just a financial setback, it can derail their entire entrepreneurial journey.
6. The Future: AI-Powered Diligence for Search Fund
This is where technology becomes transformative. With AI-powered diligence tools, searchers can:
- Review seller data in minutes, not weeks.
- Standardize analysis across financial, operational, and legal dimensions.
- Surface hidden risks and missing information before they become problems.
- Keep costs under control, preserving capital for growth post-acquisition.
By making diligence faster, smarter, and more accessible, AI enables search funds to focus on what they do best: finding great businesses and unlocking their long-term potential.
7. Conclusion
Search funds represent one of the most exciting models in SMB acquisitions, but their success depends on precision in execution. Fast, informed diligence isn’t just a competitive advantage for searchers, it’s a necessity. As the ecosystem continues to grow, tools that bring Wall Street-level rigor to Main Street deals will be the key to scaling the next generation of search fund success stories.
8. Connect with Us!
We're excited about the momentum we're building and would love to connect with you. Whether you're an investor, advisor, entrepreneur, or simply interested in the future of SMB M&A, we'd love to hear from you.
To learn more about DEALPRINT or to get involved in our journey, please reach out to us at seb.krappe@dealprint.io. We're always looking to connect with passionate individuals who share our vision for transforming how small and mid-sized businesses are bought and sold.
Thank you for being part of our story. This is just the beginning.