How a Search Fund Works: Investors, Search, Exit

A search fund is a small group of investors backing one entrepreneur, the searcher, first to look for a private company to buy and then to run it as CEO. The money comes in two steps. Investors put up a modest pool of search capital. The searcher looks for a company for roughly a year or two. The larger acquisition money then comes from the same investors and others. After that, the searcher runs the company with an investor-led board until a sale or other exit. This primer is for people considering a search or sitting across the table from one, and it flags where insurance questions appear along the way.

The short answer

Investors fund the search with a small amount of money, then decide whether to fund the acquisition.
Stanford says about 58% of search funds that concluded their search went on to acquire a company, typically about 20 months after starting.
After closing, investors usually hold most of the board seats and the searcher runs the company as CEO.
Practitioners commonly describe the searcher's reward as equity earned over time and on performance. Terms vary by fund and belong with deal counsel.
Insurance questions show up at diligence, closing, board formation and each add-on.

What is a search fund, in plain English?

Think of it as a two-step bet on a person. Investors first pay a searcher a small amount to find a good company. If the searcher finds one, the investors get a chance to put in much more money to buy it. The searcher then becomes the CEO and runs the business.

Stanford Graduate School of Business, which has studied the model for decades, says it was conceived in 1984 and describes it as an investment vehicle through which investors support an entrepreneur's efforts to locate, acquire, manage and grow a privately held company. This primer covers the traditional (also called core) model. Other routes exist, and Stanford's own Primer on the model (a practical guide for searchers and investors) says it does not attempt to catalog every variation. For the other main path, see self-funded search vs traditional search fund.

What are the stages, and how long does each take?

IESE Business School (IESE) studies search funds outside North America, working with Stanford, and describes four stages: raise search capital, search, operate the acquired company and exit. The table adapts them and shows the acquisition inside the search-to-operate hand-off, with the timing the sources give. Treat the timing as typical for investor-backed funds, not a promise for any one search.

Stage	What happens	Who is involved	Timing the sources give
1. Raise search capital	The searcher pitches a group of investors for money to cover the search	Searcher, a group of investors	Not standardized
2. Search	Find, evaluate and negotiate with target companies; sign a letter of intent (LOI)	Searcher, investors as advisers, deal counsel	Usually one to two years; acquisitions typically take around 20 months from the start
3. Acquire and operate	Raise acquisition equity and debt, close, then run the company as CEO	Searcher as CEO, board, lender, sometimes the seller	The longest stage; IESE says the searcher typically leads the company for five to ten years
4. Exit	A sale, a recapitalization or another liquidity event for investors and the searcher	Board, investors, buyers	Fredrikson & Byron, a law firm that advises on search funds, describes investors as typically involved for about five to seven years. This is investor involvement, which is measured differently from how long a searcher leads the company; hold times vary

The word "typically" matters here. Stanford's 2026 study also tracks 67 "long duration enterprises" as a separate group, and hold times vary a lot, so ask your investors what they expect.

How does search capital work?

Search capital is the money raised to pay for the search itself, mainly the searcher's salary, travel and administrative costs. Fredrikson & Byron, a law firm that advises on search funds, describes the traditional raise as roughly half a million dollars. In IESE's international research, the median fund raised about $502,000 from 15 investors, with a median annual searcher salary of $100,000. Those are international medians, not U.S. figures.

For investors it is a two-stage investment: a small first check to fund the search, then a much larger second decision at acquisition. If the searcher moves ahead with a deal, each search investor typically gets a pro rata right of first refusal on the equity needed to buy the company. In plain words, they get first call to invest in proportion to what they put in. Terms vary by fund, so read the actual documents.

The search entity itself is small and often has limited operating exposure, but if it pays a salary, state workers' compensation rules may apply to it, so ask your broker and investors what coverage is expected while you search. The larger insurance questions arrive with the operating company. The search fund insurance guide walks through what changes at each stage.

What are the odds that a search ends in an acquisition?

Stanford's 2026 study, with data through December 31, 2025, says its center has tracked over 850 U.S. and Canadian search funds since 1996. About 58% of funds that have concluded their search went on to acquire a company. For funds launched from 2021 to 2024, about half have acquired a company, but some of those funds are still searching, so that figure will move.

Two cautions. First, these are aggregate figures for investor-backed funds, not predictions for one searcher. Second, they do not cover self-funded searchers, buyers financed with Small Business Administration (SBA) loans or deal-by-deal sponsors, and this guide knows of no comparable published rates for them. One broker summary of Stanford's recent data (Calder Capital) says that when a letter of intent fails, due diligence findings are the most-cited reason. IESE's international research shows the same pattern. Insurance and loss history are part of diligence, so it pays to look early (see the due diligence checklist).

What does the acquisition look like once you find a company?

Stanford reports a median purchase price of $16 million for companies acquired by search funds in 2024 and 2025, and names services, software and education as the industries searchers targeted most. Financing generally combines investor equity with some debt, and sometimes seller financing. IESE's separate international research, which is not U.S. data, found that investors' equity financed 46% of the price on average in Europe and 62% in Latin America, with debt and other sources covering the rest. No comparable U.S. split was sourced, so do not assume one.

A hypothetical example. A searcher spends 20 months looking, reviews several companies and signs an LOI with a services company. Diligence turns up a customer contract that ends if ownership changes. The searcher renegotiates, the investors exercise their right to fund their share of the equity, a lender provides debt, and the deal closes. On closing day the buyer has to know which policies stay in force and which need replacing. In a stock purchase the company's existing policies usually continue but may have change-in-control terms. In an asset purchase the buyer's new company usually needs its own policies bound. The lender may have a list of required coverages, and the investors and board may ask about directors and officers (D&O) coverage. None of that happened by accident. It was on the closing checklist because someone asked in diligence.

Who sits on the board, and how is the searcher paid?

After the acquisition, investors typically hold a majority of the board seats, and industry professionals or former searchers sometimes serve too. The board sets strategy and the searcher, now CEO, carries it out. Board size and makeup are set in each company's governing documents.

The searcher is generally paid in two ways: a salary during the search and operation, and equity that practitioners commonly describe as earned partly over time and partly on performance milestones. That ties your reward to the company's results, not just to showing up. Exact percentages, any step-up in how search capital converts into acquisition equity, and the vesting split are negotiated and differ by fund, so this guide does not quote numbers. Questions to put to deal counsel: how search capital converts into acquisition equity, which part of your equity is earned over time, which depends on performance, who sets the performance milestones, what happens to unvested equity if you leave or the board removes you, and whether you personally guaranty any debt. Stanford's A Primer on Search Funds is a practical guide to the model, so ask your investors and deal counsel which parts apply to your fund.

A formal board and outside investors are also why directors and officers insurance comes up. Whether investors require it is a matter for the investor documents and the board. See D&O insurance for search fund boards and investors and insurance reporting to investors.

What happens when the company is sold?

A law firm lists the usual exits as a direct sale of the company, a public offering, or another liquidity event such as repaying investor debt, selling investor equity to other investors, or paying dividends. IESE's international research adds that its exited funds exited through recapitalizations involving secondary buyouts (a sale to another investment firm) or strategic mergers and acquisitions (a sale to or merger with an operating company). A clean insurance and loss history can matter to the next buyer (see clean loss history and exit value).

Many search fund companies also buy smaller companies along the way (add-ons). Each add-on brings its own policies, a possible ownership change report to the workers' compensation insurer and its own lender terms. See insurance for holding companies and roll-ups.

Where do insurance questions come up in a search fund?

Diligence. Ask for the target's declarations pages and loss runs. A quote request during diligence is not coverage, but it helps the investment model use realistic costs.
Closing. Whether the company needs new policies bound before closing or the target's policies continue depends on whether you buy assets or stock (see asset purchase vs stock purchase). Coverage is only in force once a carrier binds it.
The board. Directors and officers coverage, indemnification and investor reporting come up when investors take seats.
After closing. Report the ownership change to your workers' compensation insurer on time (see the first 90 days guide).

If you are close to a letter of intent, a broker can request quotes so the investor model carries real insurance costs. Morrow can review inherited policies and flag gaps, and it focuses on business insurance. Equity terms and tax belong with deal counsel and your accountant.

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Frequently asked questions

How much money does a search fund raise to search?

Fredrikson & Byron, a law firm that advises on search funds, describes a traditional search raise as roughly half a million dollars. The international median in IESE's recent research was about $502,000 from 15 investors. Those figures cover investor-backed funds, and amounts vary by fund and region.

Does the searcher get paid during the search?

Usually yes. Search capital typically covers a searcher salary plus travel and administrative costs. IESE's international sample shows a median annual searcher salary of $100,000, but that is not U.S. data and amounts vary by fund, so ask the investors.

How long does it take a search fund to buy a company?

Stanford says acquisitions typically take around 20 months from the start of the search. Some searches take longer, and some end without a purchase.

What happens if the search never finds a company?

Roughly four in ten concluded U.S. and Canadian searches did not end in an acquisition (Stanford 2026: about 58% acquired). Wind-down terms vary by fund, so read the investor agreement.

Who owns the company after a search fund acquisition?

Ownership is split among the investors and the searcher, and the exact split is set in the deal documents. Investors typically hold a majority of the board seats. Ask deal counsel how your documents divide equity.

Does a search fund company need directors and officers insurance?

It depends on the investors, the board and the governing documents. Outside investors and a formal board are a common reason to ask the question, so raise it with your broker and board before closing.

References

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Send Morrow the declarations pages, loss runs and key contracts you inherited. Morrow can review them against the business you bought, flag gaps and request quotes where it makes sense. Any new terms depend on carrier underwriting.

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This article is general information, not legal, tax or financial advice, and not a coverage determination. Coverage depends on the actual policy wording, carrier underwriting, your purchase agreement and your contracts. Ask your attorney and accountant about deal and legal questions.

How Search Funds Work: Investors, Search and Acquisition