Is a search fund the same as private equity?

No, though the money behind it comes from similar places. A private equity fund buys many companies and installs or keeps management; a search fund is one person buying one company to run it personally. Both expect to sell again in time.

How long does a search fund keep a company?

Often five to ten years, though the structure sets no fixed date. The investors expect a return, so a sale or a recapitalization is the usual ending. Some searchers arrange to keep the company longer by buying out their investors.

Will the searcher keep my employees?

Usually, at least through their own ownership. Searchers are buying the business as it stands and are learning it as they go, so the team is their most valuable asset in the first years. What happens after the second sale depends on the next buyer.

Do I have to finance part of the sale?

Often, yes. Search fund deals commonly include a seller note, meaning you accept part of the price over time. It is negotiable, and the size and terms matter, so have an advisor review any note before you agree to it.

How do I know if a searcher can actually close?

Ask who is funding the purchase, how much is committed in writing, and whether a bank has issued a commitment letter. Ask to speak with an investor. A serious searcher will arrange the call.

What is a search fund? A seller's guide

In short

A search fund is a small pool of money raised by one person, the searcher, from a group of investors, to spend up to about two years finding a single established business to buy and then run. When the searcher finds your company, the same investors, often joined by others, fund the purchase, and the searcher takes over as the new owner-operator. For a seller, that means a capable individual in your chair with institutional money behind them, and a group of investors who generally expect the company to be sold again within roughly five to ten years.

A search fund is a small pool of money that one person, called the searcher, raises from a group of investors in order to spend up to about two years looking for a single established business to buy and then run. When the searcher finds a company, the same investors, often joined by a few new ones, provide the money for the purchase, and the searcher takes over as the new owner and the person in charge day to day.

If a searcher has approached you, that is what is behind the polite email. This article explains how the model works, who the searcher usually is, what they look for, what changes after they buy, and the questions worth asking before you spend an afternoon with one.

It is written from your side of the table. Most of what exists on search funds is written for investors or for people who want to become searchers. Very little of it tells the owner of a thirty-year-old company what the model means for the people and the name they are handing over.

How a search fund works, step by step

The model dates from the mid-1980s, when it was developed at Stanford's business school, and it has grown into a recognizable path that business schools now teach and a community of investors now funds. The mechanics follow the same order almost every time.

01Raising the search. The searcher, usually one person and sometimes a pair, raises a modest sum from a group of investors, often experienced business owners, former searchers, and small investment firms that specialize in this model. That money pays the searcher a salary and covers expenses while they look.
02The search itself. For up to about two years the searcher contacts owners, brokers, and advisors, reviews hundreds of companies, and tries to find one that fits. Most of the businesses they look at will not. If you have received a letter from a searcher, you are one of many, and that is not a slight; it is the arithmetic of the model.
03Finding a company and agreeing terms. When the searcher finds a business they want, they negotiate a price and structure with the owner and sign a letter of intent. This is the point at which most sellers first learn what a search fund is.
04Raising the purchase money. The searcher goes back to the investors who funded the search, and often to others, to raise the far larger sum needed to buy the company. The search investors typically have the right to participate first. A bank loan, and often a note from the seller, usually make up part of the price.
05Running the company. After closing, the searcher moves into your office, or one near it, and runs the business as its owner-operator with a board drawn from the investors. This is the stage they raised the money for, and most intend to stay for years.
06The eventual sale. The investors put money in expecting to get it back with a return, so the company is generally sold again, often within roughly five to ten years, sometimes to a larger buyer and sometimes to the searcher themselves through a recapitalization. Some searchers hold longer. The structure does not require a sale on a fixed date, but it does expect one.

Who the searcher usually is

Searchers tend to come from two backgrounds. The first is a recent graduate of a business school program, often with a few years in consulting, finance, or a large company beforehand, who has decided that they would rather run one real business than climb inside a large one. The second is a mid-career operator who has managed a division or a company for someone else and wants to own one.

Either way, you are usually meeting a first-time owner. That is not a reason to dismiss them. Many searchers are capable, humble, and hardworking, and the investors behind them have seen the model succeed enough times to keep funding it. It is a reason to ask about the specific person in front of you rather than the model in general, because with a search fund, the person is the plan.

It also explains a few things you may notice. Searchers ask a great many questions, because they are learning your industry as they go. They tend to be careful and thorough in diligence, because it is their own career on the line. And they usually want you to stay for a transition period, because the fastest way to learn a business is from the person who built it.

What a search fund looks for in a business

Searchers and their investors look for a particular kind of company, and knowing the profile tells you whether the interest is likely to be serious.

Steady, predictable earnings, ideally with customers who come back year after year. A searcher is buying a business partly with borrowed money, and steady cash flow is what services the loan.
An established history, often measured in decades rather than years. The model favors companies that have already proven they can survive.
An industry that is not dominated by a few giants, where a well-run local or regional company can keep its position.
A team that can run the day to day, or at least operations that can be learned in a transition. A business that lives entirely in the owner's head is hard for anyone to buy, and hardest for a first-time owner.
A size that a small investor group and a bank can finance together. Search funds tend to buy small and mid-sized companies, generally larger than a single individual could afford alone and smaller than a private equity fund would pursue.

If your company fits that profile, expect to hear from searchers. If it does not, the interest may still be genuine, but the financing will be harder to complete, and that becomes your risk as much as theirs.

What changes after a searcher buys your company

The most visible change is the person in your chair. The searcher becomes the owner-operator, and the daily decisions that were yours become theirs. Most searchers move slowly in the first year, keep the team, and keep the name, because their investors chose your business for what it already is and because a new owner who tears up a working company in year one rarely lasts.

The less visible change is the board. Your company now has one, made up of the investors who funded the purchase, and the searcher reports to it. That board brings experience and discipline, and it also brings the expectation that the investment will be returned. In practice this shows up as more measurement, cleaner financial reporting, and a steady push for growth, most of which a well-run company can absorb.

The change you should plan for is the second sale. The investors expect one, and the searcher's own financial reward is largely tied to it. Your team, your name, and your customers will therefore meet another owner in a number of years, and you will have no say in who it is. For some owners that is acceptable. For others it is the whole question.

The trade-offs from the seller's seat

Every buyer type is a set of trade-offs. These are the ones that come with a search fund.

In your favor: a motivated successor who will show up every day and treat your company as their career rather than one holding among many.
In your favor: a slow, respectful transition is usually in the searcher's interest, since they need to learn the business from you.
In your favor: the team and the name usually stay, at least through the searcher's ownership.
To watch: certainty to close. Until the purchase money is raised and the bank has committed, the offer is a plan. Ask what is committed in writing.
To watch: price and structure. Searchers often pay a fair price rather than the highest one, and the structure commonly includes a seller note, which means you are lending part of the price back to the buyer.
To watch: the second sale, and the fact that your company's next owner after the searcher will be chosen by people you have never met.
To watch: experience. One person's judgment now carries the company. Ask what they have run before and who is advising them.

Questions to ask a searcher before you go further

Searchers expect questions, and the good ones welcome them. These six will tell you most of what you need to know.

01Who are your investors, and how much of the purchase price is committed today? Ask to speak with one of them.
02What have you run before, and what happened to the people who worked there?
03When do your investors expect a sale, and what would you do if the business needed patience at that moment?
04What will you change in the first year, and what will you leave alone? Ask for specifics, not assurances.
05How will my managers and my customers be told, and by whom?
06What do you believe, and where has it shown up? Every owner brings values into a company, stated or not. A searcher who can answer plainly has thought about what your company will stand for after you leave. One who cannot will be deciding it on the fly.

Where 323 Capital sits

We are not a search fund, and it is worth being plain about the difference. 323 Capital is a private holding company with permanent capital: no investor group waiting for a return, no fund clock, and no plan to sell. We do not buy with months or quarters in mind. We buy with decades in mind.

We say that without any criticism of searchers. Many of them are exactly the kind of owner a company deserves, and for a smaller business that needs a hands-on successor, a good searcher can be the best answer available. The difference is structural, and it is the one this article has tried to make clear: a search fund expects to sell your company again, and we do not.

The other difference is what the structure serves. The firm is named for Colossians 3:23, "In all things, work as for the Lord and not for man", and we state that standard publicly so that the owners who sell to us can hold us to it. In practice it means what is said in the first conversation is what is done in the tenth year, long after any transition agreement has run out. Our article on why the firm is named 323 says more.

Our record is one company long. On New Year's Eve 2024, 323 Capital acquired Midwest Information Systems, a Schaumburg, Illinois company founded in 1988 that makes PAXIT imaging software and PAXcam cameras for laboratories. The team stayed. The name stayed. If a searcher has approached you and you would like a second opinion on the kind of buyer you are talking to, we are glad to give one, and glad to sign a nondisclosure agreement before you share anything at all. Write to General@323cap.com, and we will reply within two business days.

Questions owners ask

Is a search fund the same as private equity?: No, though the money behind it comes from similar places. A private equity fund buys many companies and installs or keeps management; a search fund is one person buying one company to run it personally. Both expect to sell again in time.
How long does a search fund keep a company?: Often five to ten years, though the structure sets no fixed date. The investors expect a return, so a sale or a recapitalization is the usual ending. Some searchers arrange to keep the company longer by buying out their investors.
Will the searcher keep my employees?: Usually, at least through their own ownership. Searchers are buying the business as it stands and are learning it as they go, so the team is their most valuable asset in the first years. What happens after the second sale depends on the next buyer.
Do I have to finance part of the sale?: Often, yes. Search fund deals commonly include a seller note, meaning you accept part of the price over time. It is negotiable, and the size and terms matter, so have an advisor review any note before you agree to it.
How do I know if a searcher can actually close?: Ask who is funding the purchase, how much is committed in writing, and whether a bank has issued a commitment letter. Ask to speak with an investor. A serious searcher will arrange the call.

What is a search fund, and what it means when one wants to buy your business