Search funds and ETA, explained
A search fund is a structure in which a buyer with little capital raises money from investors, first to fund a one to two year search for a company, then to acquire a profitable SME or startup they will run for five to seven years before selling it. Investors carry the capital; the buyer brings the work and negotiates a stake of twenty to thirty percent that vests against results. Two variants exist: the traditional search fund, with a salary but dilution from day one, and self funded search, leaner, where you raise money only once a target is under a signed letter of intent.
The term search fund comes up more and more in acquisition circles, often misunderstood, sometimes mistaken for a conventional investment fund. It actually describes something very precise: a structure in which a buyer, usually alone and without large personal capital, raises money from investors first to fund their search for a company to acquire, and then to fund the acquisition of a business they will go on to run full time. It is a particular form of what is called ETA, for entrepreneurship through acquisition, meaning becoming an entrepreneur not by starting a company but by taking over one that already works.
The model was born in American universities in the mid 1980s and grew first inside the major business schools, before reaching Europe and then France in recent years. The underlying idea is simple and powerful: there are thousands of sound, profitable SMEs and startups whose owners are retiring with no successor, and there are talented buyers who lack the million euros it takes to buy them. The search fund connects the two by having investors carry the capital and the buyer carry the work.
The four stages of a search fund deal
A deal always follows the same sequence, and each stage has its own financial logic. Understanding this sequence avoids the first beginner mistake, which is to blur everything together and believe you raise the purchase money on the day you set out.
- The search raise: the buyer gathers a small initial amount, put up by around a dozen investors, to pay themselves a modest salary and cover costs during the search phase, which often lasts one to two years.
- Search and acquisition: during this period the buyer identifies targets, analyzes them and negotiates. When they find the right SME or startup, the same investors have a right, but not an obligation, to fund the purchase.
- Operation: once the company is bought, the buyer becomes its full time operating leader, usually for five to seven years, with a mandate to grow it and improve its profitability.
- Exit: at the end of that period the company is sold or passed on, and the gain is shared between investors and buyer under rules set from the very start.
Traditional search fund or self funded search
There are two main ways to practice ETA, and confusing them leads to poor decisions. The traditional search fund rests on the search raise described above: investors pay the buyer to search. It is comfortable, it provides a salary and a network, but it means sharing the company’s equity from day one and accepting significant dilution.
Self funded search is the other route. The buyer searches alone, on their own money, with no salary and no investors during the search phase. They only raise funds once they have a target signed under a letter of intent. The upside is that they keep a far larger share of the equity; the downside is that they carry the risk and the financial pressure alone for months. In France, where the ecosystem of specialized investors is still young, many buyers start with this second route, leaner and more accessible. It is often where I suggest beginning: you learn to read targets for real before you owe anyone a quarterly update.
A search fund does not buy a company with the buyer’s money, it buys search time with the investors’ money, then the company with a blend of debt and equity. The buyer brings their work first, not their checkbook.
The economics of a deal, with round numbers
Take a deliberately simplified example to make the mechanics concrete. You spot a target with an EBITDA of 800k euros and agree on an acquisition price of 4m euros, or five times EBITDA. The financing typically combines three sources: acquisition bank debt, equity put up by investors, and sometimes a seller loan granted by the departing owner.
- Acquisition debt: the bank lends, say, 2m euros, repayable over seven years. This debt sits on the acquired company, whose cash flow will service the repayment.
- Investor equity: they put up, say, 1.6m euros to complete the round and fund some working capital and transaction costs.
- Seller loan: the owner agrees to defer 400k euros of the price, paid over a few years, which aligns their interests with the success of the handover.
The buyer themselves often puts in only a token amount, but negotiates a stake that can reach twenty to thirty percent of the equity, released gradually if they hit performance and return targets for the investors. If, after six years, the company has grown its EBITDA from 800k to 1.3m euros and sells at the same multiple of five, its value rises from 4m to 6.5m euros. After repaying the debt, the gain rewards both the investors and the buyer. It is this twin mechanism, earnings growth and debt paydown, that creates the wealth, not a lucky purchase.
What the model really demands of the buyer
The search fund appeals because it promises a path to ownership with little starting capital. The reality is rougher. You have to convince investors to back you before you even have a target, sustain a long and solitary search, run a serious negotiation and due diligence, then lead a company you are still discovering while repaying debt that does not forgive bad months. The buyers I see succeed are not the sharpest on a spreadsheet; they are the most stubborn and the clearest eyed about price. A different path, then, with its own demands, not a shortcut.
- Credibility: with no personal balance sheet to show, you are selling your judgment. A clear acquisition thesis and rigorous financial analysis are worth more than any pitch.
- Price discipline: the model only works if the acquisition debt stays within what the cash flow can repay. Overpaying dooms the deal before the first year is out.
- Endurance: the search phase wears people down, and most of those who quit do so out of weariness, not for lack of targets.
- Operating sense: taking over is not analyzing, it is leading. The best numbers are worth nothing if you cannot hold a team and clients together after the purchase.
Where to start in practice
Whether you aim for a traditional search fund or a self funded search, the first building block is always the same: knowing how to read a target. Before you talk to investors, you have to be able to adjust an EBITDA, rebuild the cash flow that is genuinely available, and check that a price holds up against the debt it implies. That is exactly the approach set out in our guide on debt capacity before buying an SME or startup: price is not set by the headline multiple, it is set by what the cash flow can repay without choking the business.
Search funds and ETA are neither a fad nor a magic formula. They are financing structures that let a good buyer turn work and judgment into business ownership where capital was missing. The model rewards those who stay disciplined on price, clear eyed about risk, and patient in the search. If you are studying a target and considering financing it through this kind of structure, have its repayment capacity modeled before you commit: that is where the success of the whole deal is decided.
Key points
- ETA, entrepreneurship through acquisition, means becoming an owner by taking over a working business rather than starting one.
- A deal runs in four stages: the search raise, search and acquisition, five to seven years of operating, then exit.
- Two routes: the traditional search fund (salary and network, but heavy dilution) and self funded search (more equity kept, but risk carried alone).
- Wealth comes from two engines, EBITDA growth and debt paydown, not from an opportunistic purchase.
- Price is set not by the headline multiple but by what the target’s cash flow can repay.
Frequently asked questions
Do I need personal capital to launch a search fund?
No, and that is precisely the point of the model: investors fund the search and then the acquisition. The buyer often puts in only a token amount and is paid mainly through an equity stake, on the order of twenty to thirty percent, that vests if targets are met. What you do need to bring is time, a credible acquisition thesis, and the stamina to sustain a long search.
How long does the search phase last?
Usually one to two years from launch to signing. It is the most testing period because it is solitary and uncertain, and most of those who drop out do so from fatigue rather than a lack of targets. A structured deal flow and clear selection criteria shorten it noticeably.
Does the search fund model actually work in France?
Yes, though the ecosystem of specialized investors is younger there than in English speaking markets. Many French buyers therefore start with a self funded search and structure an investor round once a target is identified. The pool of SMEs and startups to hand over with no successor, on the other hand, is wide.
How is it different from a classic LBO?
A classic LBO can be run by a fund buying for its portfolio, with no one personally taking the operating helm. In a search fund the buyer becomes the full time leader and their stake depends on real performance. Debt leverage exists in both, but here it sits alongside a total personal commitment to running the business.
Analyzing a deal?
Get buy side financial analysis and SME due diligence built for searchers, entrepreneurs and investors.
Discuss a deal