Jason Fan

Nov 17, 2023

Jason Fan

Nov 17, 2023

What are Search Funds?

A search fund is an emerging type of acquisition-focused fund run by an individual "searcher", often a MBA graduate from top MBA programs like Stanford, Harvard, or Booth. This person raises capital from private equity partners with the goal of acquiring, operating, and growing a single business. Because they are backed by private equity, traditional search funds typically look to the higher end of small businesses, with valuations from $5m to $100m.

Many private equity firms have offloaded the work of sourcing attractive acquisition targets to searchers, who tend to be entrepreneurial individuals with strong credentials. In exchange for equity financing in the transaction, the searcher will receive 20-30% of the company that they must earn through hitting growth targets over the next 4+ years. You can think of it this way - some entrepreneurs want to become 0 to 1 founders, but others are better suited for taking existing companies from 100 to 1000 and beyond. This is the role search funds play.

Search funds are serious buyers. Unlike other individuals who may contact you, they are have already received a round of financing from their private equity partners, and they use this capital to fund their full-time search efforts. Many of them also hire their own team of analysts and interns to help with the search. Statiscally, 70% of search funds end up closing on a transaction within 24 months.

Selling your SaaS business to a search fund

Compared to other buyers, search funds have some unique characteristics

Business type

Since searchers usually step in as the CEO themselves and are backed by capital partners with growth requirements, they can be quite picky about the type of businesses they acquire. Most will prefer service businesses with recurring revenue, as this reduces the risk of churn post-acquisition. B2B SaaS companies are especially attractive to searchers due to the high margins, sticky revenue, and the ability to operate the business remotely.

Most search funds will only look at SaaS companies with >$3mm in ARR, since they need to be able to generate strong returns for themselves and their investors, which is difficult to do if the business is too small. They will typically also prefer companies that are bootstrapped or have raised minimal capital (total capital raised < ARR).

Searchers do not require a SaaS company to be profitable, but will require evidence that the company can become profitable quickly. Usually this means having >80% gross margins. The Rule of 40 is a common rule of thumb for both searchers and other buyers to determine if the growth and profitability of a business is enough to justify an acquisition.

Price

Search funds have significant flexibility in how they structure deals. Unlike many PE firms they are not looking for distressed companies they can swoop in and acquire for cheap - they are looking for strong businesses that they can operate and grow for the next 5-10 years of their life.

In 2023, the typical acquisition multiples for SaaS companies by searchers will be between 3x and 6x ARR, with a median of about 5x ARR.

Time-to-Close

Search funds do require their capital partners to approve a transaction, although this is not usually what causes a deal to fall through. Many will be able to close in as little as 30 days, but average around 90 days.

Transition

Searchers will typically ask you to stay on for a period of time to help with the transition. Depending on the nature and scale of your business, this could be as long as 2 years or as short as 3 months, and should be something you negotiate in the letters of intent (LOIs) you receive.

Conclusion

Selling your business to a search fund is a new but great option if you're the owner of a SaaS business with >$2mm in revenue. Oftentimes founders are in situations where they are unable to raise financing for their next round or want to step away from the business to focus on something else. This is an ideal situation for an exit to a search fund, where you can get liquidity from your business without publicly marketing it for sale, which could damage your growth or relationship with your investors.

You can read more about search funds on the website of Stanford's Graduate School of Business - one of the top schools for search funds.

Dealwise has the largest network of search funds looking to deploy capital to acquire SaaS businesses across the US and Canada. Drop us a note here and we'll be more than happy to introduce you to a few in our network, at no cost to you. Our fees are entirely paid for by the buyer.

To embed a website or widget, add it to the properties panel.

What are Search Funds?

A search fund is an emerging type of acquisition-focused fund run by an individual "searcher", often a MBA graduate from top MBA programs like Stanford, Harvard, or Booth. This person raises capital from private equity partners with the goal of acquiring, operating, and growing a single business. Because they are backed by private equity, traditional search funds typically look to the higher end of small businesses, with valuations from $5m to $100m.

Many private equity firms have offloaded the work of sourcing attractive acquisition targets to searchers, who tend to be entrepreneurial individuals with strong credentials. In exchange for equity financing in the transaction, the searcher will receive 20-30% of the company that they must earn through hitting growth targets over the next 4+ years. You can think of it this way - some entrepreneurs want to become 0 to 1 founders, but others are better suited for taking existing companies from 100 to 1000 and beyond. This is the role search funds play.

Search funds are serious buyers. Unlike other individuals who may contact you, they are have already received a round of financing from their private equity partners, and they use this capital to fund their full-time search efforts. Many of them also hire their own team of analysts and interns to help with the search. Statiscally, 70% of search funds end up closing on a transaction within 24 months.

Selling your SaaS business to a search fund

Compared to other buyers, search funds have some unique characteristics

Business type

Since searchers usually step in as the CEO themselves and are backed by capital partners with growth requirements, they can be quite picky about the type of businesses they acquire. Most will prefer service businesses with recurring revenue, as this reduces the risk of churn post-acquisition. B2B SaaS companies are especially attractive to searchers due to the high margins, sticky revenue, and the ability to operate the business remotely.

Most search funds will only look at SaaS companies with >$3mm in ARR, since they need to be able to generate strong returns for themselves and their investors, which is difficult to do if the business is too small. They will typically also prefer companies that are bootstrapped or have raised minimal capital (total capital raised < ARR).

Searchers do not require a SaaS company to be profitable, but will require evidence that the company can become profitable quickly. Usually this means having >80% gross margins. The Rule of 40 is a common rule of thumb for both searchers and other buyers to determine if the growth and profitability of a business is enough to justify an acquisition.

Price

Search funds have significant flexibility in how they structure deals. Unlike many PE firms they are not looking for distressed companies they can swoop in and acquire for cheap - they are looking for strong businesses that they can operate and grow for the next 5-10 years of their life.

In 2023, the typical acquisition multiples for SaaS companies by searchers will be between 3x and 6x ARR, with a median of about 5x ARR.

Time-to-Close

Search funds do require their capital partners to approve a transaction, although this is not usually what causes a deal to fall through. Many will be able to close in as little as 30 days, but average around 90 days.

Transition

Searchers will typically ask you to stay on for a period of time to help with the transition. Depending on the nature and scale of your business, this could be as long as 2 years or as short as 3 months, and should be something you negotiate in the letters of intent (LOIs) you receive.

Conclusion

Selling your business to a search fund is a new but great option if you're the owner of a SaaS business with >$2mm in revenue. Oftentimes founders are in situations where they are unable to raise financing for their next round or want to step away from the business to focus on something else. This is an ideal situation for an exit to a search fund, where you can get liquidity from your business without publicly marketing it for sale, which could damage your growth or relationship with your investors.

You can read more about search funds on the website of Stanford's Graduate School of Business - one of the top schools for search funds.

Dealwise has the largest network of search funds looking to deploy capital to acquire SaaS businesses across the US and Canada. Drop us a note here and we'll be more than happy to introduce you to a few in our network, at no cost to you. Our fees are entirely paid for by the buyer.

To embed a website or widget, add it to the properties panel.

What Are Search Funds?

Nov 17, 2023

You may have gotten emails from indivdiuals who sound like investment firms offering to buy your business. Who are they and are they legit?

What are Search Funds?

A search fund is an emerging type of acquisition-focused fund run by an individual "searcher", often a MBA graduate from top MBA programs like Stanford, Harvard, or Booth. This person raises capital from private equity partners with the goal of acquiring, operating, and growing a single business. Because they are backed by private equity, traditional search funds typically look to the higher end of small businesses, with valuations from $5m to $100m.

Many private equity firms have offloaded the work of sourcing attractive acquisition targets to searchers, who tend to be entrepreneurial individuals with strong credentials. In exchange for equity financing in the transaction, the searcher will receive 20-30% of the company that they must earn through hitting growth targets over the next 4+ years. You can think of it this way - some entrepreneurs want to become 0 to 1 founders, but others are better suited for taking existing companies from 100 to 1000 and beyond. This is the role search funds play.

Search funds are serious buyers. Unlike other individuals who may contact you, they are have already received a round of financing from their private equity partners, and they use this capital to fund their full-time search efforts. Many of them also hire their own team of analysts and interns to help with the search. Statiscally, 70% of search funds end up closing on a transaction within 24 months.

Selling your SaaS business to a search fund

Compared to other buyers, search funds have some unique characteristics

Business type

Since searchers usually step in as the CEO themselves and are backed by capital partners with growth requirements, they can be quite picky about the type of businesses they acquire. Most will prefer service businesses with recurring revenue, as this reduces the risk of churn post-acquisition. B2B SaaS companies are especially attractive to searchers due to the high margins, sticky revenue, and the ability to operate the business remotely.

Most search funds will only look at SaaS companies with >$3mm in ARR, since they need to be able to generate strong returns for themselves and their investors, which is difficult to do if the business is too small. They will typically also prefer companies that are bootstrapped or have raised minimal capital (total capital raised < ARR).

Searchers do not require a SaaS company to be profitable, but will require evidence that the company can become profitable quickly. Usually this means having >80% gross margins. The Rule of 40 is a common rule of thumb for both searchers and other buyers to determine if the growth and profitability of a business is enough to justify an acquisition.

Price

Search funds have significant flexibility in how they structure deals. Unlike many PE firms they are not looking for distressed companies they can swoop in and acquire for cheap - they are looking for strong businesses that they can operate and grow for the next 5-10 years of their life.

In 2023, the typical acquisition multiples for SaaS companies by searchers will be between 3x and 6x ARR, with a median of about 5x ARR.

Time-to-Close

Search funds do require their capital partners to approve a transaction, although this is not usually what causes a deal to fall through. Many will be able to close in as little as 30 days, but average around 90 days.

Transition

Searchers will typically ask you to stay on for a period of time to help with the transition. Depending on the nature and scale of your business, this could be as long as 2 years or as short as 3 months, and should be something you negotiate in the letters of intent (LOIs) you receive.

Conclusion

Selling your business to a search fund is a new but great option if you're the owner of a SaaS business with >$2mm in revenue. Oftentimes founders are in situations where they are unable to raise financing for their next round or want to step away from the business to focus on something else. This is an ideal situation for an exit to a search fund, where you can get liquidity from your business without publicly marketing it for sale, which could damage your growth or relationship with your investors.

You can read more about search funds on the website of Stanford's Graduate School of Business - one of the top schools for search funds.

Dealwise has the largest network of search funds looking to deploy capital to acquire SaaS businesses across the US and Canada. Drop us a note here and we'll be more than happy to introduce you to a few in our network, at no cost to you. Our fees are entirely paid for by the buyer.

To embed a website or widget, add it to the properties panel.
Dealwise

2024 Dealwise Advisors LLC. All Rights Reserved

Dealwise Advisors LLC is not a bank or a lender. We are an online marketplace that assists individuals and businesses in securing financing by connecting them with multiple third-party lenders. Our services include evaluating your financing needs, presenting your loan request to our network of lenders, and helping you navigate the loan process. As a broker, we do not directly originate or underwrite loans, take deposits, or offer banking services. We may receive fees for our services from the lending institution upon the successful closing of a loan.

Dealwise

2024 Dealwise Advisors LLC. All Rights Reserved

Dealwise Advisors LLC is not a bank or a lender. We are an online marketplace that assists individuals and businesses in securing financing by connecting them with multiple third-party lenders. Our services include evaluating your financing needs, presenting your loan request to our network of lenders, and helping you navigate the loan process. As a broker, we do not directly originate or underwrite loans, take deposits, or offer banking services. We may receive fees for our services from the lending institution upon the successful closing of a loan.

Dealwise

2024 Dealwise Advisors LLC. All Rights Reserved

Dealwise Advisors LLC is not a bank or a lender. We are an online marketplace that assists individuals and businesses in securing financing by connecting them with multiple third-party lenders. Our services include evaluating your financing needs, presenting your loan request to our network of lenders, and helping you navigate the loan process. As a broker, we do not directly originate or underwrite loans, take deposits, or offer banking services. We may receive fees for our services from the lending institution upon the successful closing of a loan.