Cracking the Code: What Search Fund Investors Really Want

When it comes to search fund investing, the old adage holds true: investors bet on the jockey and the horse. Speaking with numerous seasoned search fund investors, a clear picture emerges of what makes them open their checkbooks—and what sends them running for the hills.

## The Business Fundamentals That Make Investors Salivate

Let's start with the business side. Investors consistently look for companies with stable, recurring cash flows that can weather the inevitable turbulence of an ownership transition. Customer diversity is non-negotiable—a client roster where no single customer represents more than 10-15% of revenue provides the safety net investors crave.

Perhaps counterintuitively, "boring" beats "sexy" every time. A mundane B2B service business with predictable demand will attract investor attention faster than a flashy tech product with volatile fortunes. As one investor bluntly put it, the standard "Harvard/Stanford criteria are great checklists"—recurring revenue, diverse customers, and positive industry tailwinds.

## The Operator: More Than Just a Resume

The searcher evaluation is equally rigorous. Investors aren't just reading your resume—they're assessing whether you have what investor Steve Ressler calls "grit"—the resilience to handle entrepreneurship's inevitable rollercoaster. The ideal candidate demonstrates a balance that's difficult to achieve: enough confidence to lead decisively from day one, coupled with the humility to seek advice when needed.

Red flags that send investors running include searchers who lack self-awareness or seem resistant to guidance. By contrast, demonstrated leadership experience, genuine curiosity about the target industry, and a clear vision for growth will have investors leaning in. Remember, they're investing in you as much as the business—perhaps even more so.

## Traditional vs. Self-Funded: Different Strokes for Different Folks

The search fund landscape has evolved to include both traditional and self-funded models, each with distinct risk-reward profiles:

- Traditional search fund investors operate like venture capitalists—spreading relatively small amounts across many searches, expecting a portfolio effect where a few winners compensate for the losers. They prioritize downside protection and typically use more equity and less debt.

- Self-funded search investors often accept higher risk for potentially outsized returns. They frequently leverage SBA loans (sometimes 75-90% LTV), which can dramatically boost IRRs but also increase vulnerability if cash flow tightens.

The economic terms differ significantly too. Traditional models follow a standard playbook—1.5× step-up, 8% preferred return—ultimately offering searchers about 25-30% equity. Self-funded deals often feature straightforward equity splits or alternative structures like profit sharing, but typically require more personal capital from the searcher.

Interestingly, many experienced investors participate in both models, with their ultimate consideration being alignment of interests. As Rich Kelley of Search Fund Partners noted, traditional models force collaboration with 10-20 investor-advisors—valuable guidance that self-funded searchers might sacrifice for greater autonomy and more equity.

## Winning Investor Confidence: The Playbook

So what's the playbook for aspiring search CEOs? First, demonstrate alignment of incentives. For traditional searchers, embracing standard terms signals you're playing by established rules. For self-funded searchers, transparency about your personal investment and equity sharing shows good faith.

Second, show you understand—or can quickly learn—the industry dynamics. You don't need to be a 20-year veteran, but demonstrating subtle market insights or having industry experts on your advisory team can differentiate your pitch.

Third, cultivate trust through honest communication. The fastest way to lose investor interest is by dodging questions or presenting unrealistically optimistic financial projections. The best searchers thread the needle between optimism and realism—conveying both tremendous potential and a clear-eyed assessment of challenges.

Finally, leverage the search fund community. "Talk to as many people as you can" is advice that surfaces repeatedly. Many investors will take calls from searchers they haven't backed yet, simply to be helpful. Taking advantage of this generosity signals you're coachable and resourceful—qualities that investors prize.

The bottom line? Be prepared, be genuine, and be aligned. If you can convincingly answer "Why this person, in this deal, in this industry, at this price?" you'll not only secure funding but gain partners who can help you succeed long after the acquisition closes.