If you have never before heard of a “search fund”, don’t worry…. you’re certainly not alone. While its inception dates back to 1984, only in recent years has it surged in popularity. In its simplest form, a search fund is an investment vehicle, through which investors financially support an entrepreneur’s efforts to locate, acquire, manage, and grow a privately held company. A new generation is now emerging from elite business schools and it is comprised of young entrepreneurs who are going to Main Street rather than Wall Street. Instead of the high paying yet high stress finance jobs, these newly minted MBA grads are opting to become CEOs by looking for and subsequently acquiring small businesses. This strategy is seeing unparalleled growth as according to searchfunder.com, the number of search funds has increased a whopping 428 percent over the last five years, increasing at a rate of about 40 percent per year.

This unprecedented growth has been driven by both an awareness of the model and its success. According to searchfunder.com, “More programs about entrepreneurship through acquisition are forming at the business schools, and various universities are having conferences about the model. There’s also the global expansion—now that there have been successful search funds in other markets, people are looking to do that.” The entrepreneurs are largely targeting the small-to-middle market businesses, valued anywhere from $1 to $20 million—deals which might not make sense for the cost structures of traditional PE firms. This influx of young entrepreneurs will likely support valuations of the $1 million + business market for near future.

There are three types of search funds—traditional, self-funded, and fundless sponsors. Traditional funds are those which the “searchers” raise capital from a group of investors in order to look for a company with certain agreed upon attributes. The investors have the right of first refusal on any deals the searcher may find. Self-funded searchers finance their own search efforts but once they find a deal, they then look for outside capital. The terms are negotiated on a deal-by-deal basis, according to searchfunder.com. Self-funded searchers also often utilize SBA loans due to the favorable and flexible terms offered. Lastly, Fundless sponsors raise search capital on a deal-by-deal basis often from a single source or a group of investors. Fundless sponsors are more savvy, experienced and know how to structure deals.

Many industry insiders believe that the industry will continue to boom and this should bode well for sellers of ecommerce, SaaS and other website businesses. If the pool of buyers of a profitable online business becomes more crowded, then an experienced advisor such as W3 Business Advisors will use that leverage to extract the highest possible transaction price.