Search funds have flooded the M&A market in the US in recent years, particularly in the last several months. The 2024 Search Fund Study by Stanford Graduate School of Business states, “681 search funds have been formed in the United States and Canada since 1984.” This study also highlights a record-breaking 94 new search funds launched in the US and Canada in 2023 alone, highlighting significant recent growth in this model.

We have strong anecdotal evidence that this trend only continues to increase. In our recent deal work, our team at ACT Capital Advisors has noticed that more search funds are approaching business owners than ever before. This influx has contributed to slower deal timelines, increased uncertainty and anxiety for all parties involved, and a higher rate of transactions stalling, often due to search fund buyers’ lack of experience and committed capital.

Here are a couple of anecdotes to illustrate this:

1. Recently, our client was under LOI with a search funder.  The search funder ingratiated himself with our client and built a good bond between them. At closing, the search funder was $4MM short of the cash needed to close. He begged for 30 more days, and against our advice, our client agreed, not only once but three more times without success. Our client spent 7 months of time and money he will never get back, wasted with a search funder. Unfortunately, this is not a rare occurrence with search fund buyers, but a tragedy that occurs more often than a successful closing with them.
2. In another recent ACT deal, a search funder submitted the highest Indication of Interest (IOI). Our sellers found the offer compelling, but the search funder needed to secure funding before he could commit to a Letter of Intent (LOI). He asked ACT’s Managing Directors for help preparing marketing materials for his investors, which effectively doubled the workload on our end. Ultimately, he could not secure the necessary funding and never submitted an LOI process, wasting 60 days and alienating other serious buyers who could have moved forward.

What Exactly Are Search Funds?

Search funds are vehicles through which entrepreneurs look to buy and run a single business. There are two main types:

1. Funded Search Fund Buyers: Often young entrepreneurs, recent MBA graduates, or aspiring business owners, these searchers raise capital from investors to fund a structured process to acquire a specific business. Their goal is to operate the business as CEO with upside eventually.
2. Unfunded (Self-Funded) Search Funds: Self-funded searchers use personal funds and SBA loans to buy “forever businesses,” aiming for long-term cash flow and full ownership. They target $5M–$25M firms in services or healthcare, with deals often 75% debt-financed. Interest rates and lender approval risks can impact deal certainty.

For more information on search funders and other types of buyers, check out this article by our Managing Director, Chris Sheppard.

The Risks of Engaging with a Search Funder to Sell Your Business

1. Lack of Committed Capital: Many search funders (especially self-funded ones) will present a letter of intent to acquire a business before they have the money to go through with a deal. They are “all hat and no cattle,” as our Chairman & CEO, Robert (Bob) Hild, says in his latest article.
2.  Slower Deal Timelines: Another expression Bob uses often is, “Time kills all deals,” which could not ring truer than with search funds. Unlike more sophisticated buyers, search funders usually require more time for due diligence, investor approval, and financing, stretching key timelines and increasing the chances of deals falling apart.
3. Lack of Operations Experience: Most search funders are recent MBA graduates and first-time CEOs who lack the experience to successfully run a business. You can read all the books you want about leadership, but when it comes to leading an organization, hands-on experience is always preferred. Search funders’ inexperience can lead to poor judgment and decision-making post-sale, risking the entire legacy of the business you built. You want a buyer who will protect and enhance your legacy, not one who will destroy it.
4. Post-LOI Retrenching: It’s not unusual for search funders to revisit and try to renegotiate key terms after a Letter of Intent is signed, including purchase price, earnout structure, or working capital targets.
5. Overreliance on the Seller: After the sale, many search funders often expect the seller to remain involved longer than anticipated to help with the transition due to their lack of industry knowledge and experience, which is far from ideal for any seller. The acquisition process can take a while, and most sellers would likely rather relax on a beach somewhere or spend more time with family after cashing out.
6. Disruption to Team and Culture: A poor cultural fit between the new owner and the existing team can drive employee turnover, particularly among key staff who are essential to business continuity.
7. Failure to Close: Even after weeks or months of diligence, many search fund deals collapse due to financing hurdles, pushback from investors, or internal indecision, wasting valuable time and emotional energy.
8. Limited Strategic Resources: Unlike private equity firms or strategic buyers, search funders often lack the capital, connections, and infrastructure to support growth initiatives post-close.
9. Earnout Risk: If part of your deal value is tied to performance milestones, an inexperienced operator may jeopardize those targets, reducing your total payout in an exit.

More Reliable Alternatives to Consider

Unless you’re a serial entrepreneur, selling your business is typically a one-time event. You don’t want to get it wrong, so it’s crucial to weigh your options carefully.

There are other types of buyers that often present a smoother, more certain path to close:

• Strategic Buyers: Existing companies in your industry looking to expand that typically offer strong synergy, quick closing timelines, and experienced integration teams with knowledge of your industry.
• Private Equity Firms: Professional investors with committed capital and a long track record of successfully closing deals. Many PE firms bring experienced operators or keep current, strong management teams in place.
• Family Offices: Private wealth management firms that provide comprehensive financial services to wealthy families or groups of families. They pool capital to acquire and build “legacy” companies for long-term, multigenerational growth.

Each of these three buyer types tends to come with more reliable funding and experienced deal teams – two areas where search funds often fall short.

If you’re a business owner considering a sale sometime in the near future, try to avoid getting swept up in the excitement of a seemingly promising offer. Instead, engage with an experienced M&A firm that can evaluate each buyer candidate thoroughly, saving you time and grief and protecting your legacy so you can close with confidence.  

ACT Capital Advisors brings four decades of experience advocating for our clients’ best interests. We bring multiple buyers to the table, creating a competitive, strategic auction process designed to maximize the value of your business in an exit and ensure deal closure. As far as we’re concerned, one buyer means no buyers. If you’re considering a sale, contact us today.

About ACT Capital Advisors  

ACT Capital Advisors is a premier mergers & acquisitions firm representing lower to middle-market companies across all industries. ACT has a 40-year history of deal-making, closing 250+ transactions, and unlocking over $2.5 billion in wealth for its clients. For more information, visit https://actcapitaladvisors.com/.