A Complete Dictionary of Terms and Definitions
This search fund glossary defines 68 key terms used in small business acquisitions, ETA entrepreneurship, and investing, organized by category. We put it together based on the most common (and confusing) terms in the search fund ecosystem, from our own experience and from polling active searchers. It covers the language that matters most when buying, operating, and investing in SMBs via the search fund model.
Quick Navigation of Topics:
Jump to a topic to find terms related to that aspect of the search fund universe.
- Essential Search Fund Terminology – Core concepts for searchers and investors
- Financial Terms – Key metrics for business evaluation and returns
- Deal Process & Documentation – Legal and transaction terminology
- Deal Structure & Financing – Capital structure and funding terms
- Investment & Governance – Investor relations and board concepts
- Operational & Market Terms – Business operations and strategy
- Deal Sourcing Terms – Finding opportunities and businesses to buy
- Exit Terms – Selling the business and realizing returns
- Risk Management Terms – Key risks to searchers and investors
- Common Acronyms – Widely used abbreviations and shorthand lingo
Related Resources: For more about these concepts, see our search fund resource guide.
The search fund ecosystem has its own unique vocabulary that can be daunting for newcomers. Even seasoned professionals often need a quick reference for industry terms.
Whether you are a first-time searcher learning the basics of entrepreneurship through acquisition, an investor assessing opportunities, or an advisor supporting transactions, this guide includes the terminology used to talk about and understand search fund deals.
Essential Search Fund Terminology
These core terms lay the groundwork for understanding and talking about search funds. They’re essential concepts for anyone new to the field to learn.
Search Fund
An investment vehicle where an entrepreneur raises capital to search for, acquire, and operate a small business, often for 7-10 years. The searcher becomes CEO while investors provide search and acquisition financing.
Searcher
The entrepreneur who leads a search fund, finding and acquiring a target business to operate as CEO.
Entrepreneurship Through Acquisition (ETA)
The strategy of becoming an entrepreneur by acquiring an existing company rather than starting from scratch. ETA offers a path to small business ownership with lower startup risk.
Traditional Search Fund
The original search fund model involving institutional investors who provide both search capital and acquisition capital in exchange for majority ownership. This model often involves 15-25 investors backing a searcher. Often associated with business schools or elite universities.
Self-Funded Search Fund
A model where searchers finance their own search activities rather than raising institutional capital. Acquisitions are generally financed with a mix of an SBA loan, investor capital, and savings from the searcher. This model allows the searcher to maintain higher equity ownership (70-90%) in exchange for personal financial risk (a personal guarantee for SBA loans).
Search Capital
For traditional search funds, the initial funds raised to cover searcher expenses during the 12-24 month search period (often $400,000-$500,000). Covers salaries, travel, and due diligence costs, but not the actual acquisition.
Acquisition Capital
The money raised to purchase a target business, typically 10-20 times larger than search capital and structured as debt and equity. Searchers usually retain 15-25% equity ownership after the acquisition closes. After the deal closes, searchers keep a percentage of equity ownership (15-25% through traditional search funds and 70-90% for self-funded searchers).
Solo Searcher
An individual who conducts their search independently without a partner. They maintain full control but also take on the entire workload.
Paired Searcher
Two searchers working together to find, acquire, and operate a business, splitting responsibilities and equity ownership.
Independent Sponsor
Similar in nature to search funds, independent sponsor transactions are usually larger, with a different compensation structure.
- No committed fund at the outset.
- Finds a deal first, then raises capital on a deal-by-deal basis.
- Often works with a network of independent sponsor investors (family offices, PE funds, HNWIs).
- May self-fund initial diligence costs but not an ongoing search budget.
- Generally inserts an operator or keeps existing management in place.
- More details on search funds versus independent sponsors here.
Financial Terms
These financial concepts are crucial for evaluating businesses, structuring deals, and measuring performance throughout the search fund process.
EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization)
A measure of operating profitability that excludes financing decisions and non-cash items. It is often used for business valuations. Search fund targets generally have $1-5 million in EBITDA, due to their financing options and the complexity level of businesses this size.
SDE (Seller’s Discretionary Earnings)
A cash flow metric that adds back owner salary, benefits, and discretionary expenses to net income. Used for smaller businesses to show the total economic benefit available to a new owner, making it easier to compare businesses with different ownership structures.
Normalized EBITDA
EBITDA adjusted to exclude one-time expenses and personal benefits to the owner that they run through the business. It’s meant to exclude non-recurring costs a new owner wouldn’t incur, reflecting the true operating performance of a business. Critical for accurate valuation during due diligence.
TTM (Trailing Twelve Months)
Financial data covering the most recent 12-month period. It provides current performance metrics regardless of fiscal year timing. Trailing 12 months is the standard time frame used for evaluating a target company’s current performance.
Enterprise Value
The total value of a business, calculated as equity value plus net debt. It represents what an acquirer pays to own the entire company. Useful for comparing businesses with different capital structures.
Working Capital
Current assets minus current liabilities, representing the short-term financial health and operational efficiency of a business. Changes in working capital affect deal pricing and cash flow projections.
IRR (Internal Rate of Return)
A measure of investment performance that shows the average annual return rate, taking into account when money goes in and comes out. For example, if you invest $1 million and receive $3 million back after 5 years, your IRR would be about 25% per year. Search fund investors typically target 20-35% IRRs.
MOIC (Multiple on Invested Capital)
The total return multiple calculated by dividing total value received by initial investment amount. Successful search funds often achieve a 3-5x MOIC through operational improvements and strategic growth.
Deal Process & Documentation
These terms cover the legal and procedural aspects of finding, evaluating, and acquiring businesses through the search fund process.
NDA (Non-Disclosure Agreement)
A legal contract protecting confidential information shared between parties during the business evaluation and acquisition process. Required before accessing detailed financial information or CIMs.
CIM (Confidential Information Memorandum)
Sometimes called an offering memorandum or investment teaser. A detailed marketing document sellers or intermediaries prepare to present a business opportunity to potential buyers. It provides more complete, confidential information about the business to qualified buyers, including financial performance, customer profiles, organization chart, and growth opportunities.
LOI (Letter of Intent)
A formal but non-binding document outlining key terms and conditions of a proposed acquisition. It signals serious buyer intent and serves as the framework for definitive agreements, often granting an exclusivity period for due diligence while negotiations continue.
Due Diligence
A thorough investigation and analysis of a target business, including financial, legal, operational, and strategic aspects. Buyers typically have 60-90 days to verify the seller’s claims and identify potential risks before completing an acquisition. Often involves hiring outside specialists such as accountants, lawyers, and industry experts.
Data Room
A secure online platform where confidential business information is stored for buyer review during due diligence. Contains financial records, contracts, legal documents, and operational data that buyers can access with proper credentials and permissions.
QoE (Quality of Earnings)
A financial due diligence process that reviews and confirms the quality, sustainability, and accuracy of a target company’s reported earnings. This review is crucial for verifying that the business generates cash flows as claimed.
SPA (Stock Purchase Agreement)
A legal contract for acquiring all outstanding shares of a target company, which transfers ownership of the entire corporate entity to the buyer. It is the most common structure for search fund acquisitions.
APA (Asset Purchase Agreement)
A legal contract for acquiring specific assets and liabilities of a business rather than buying the entire corporate entity. This approach allows buyers to exclude unwanted liabilities or assets.
Representations and Warranties
Statements of fact sellers make about their business in acquisition agreements that give buyers legal recourse if those statements turn out to be false. These statements may include financial condition, legal compliance, and operational matters.
Indemnification
A contractual arrangement where one party agrees to compensate the other for certain losses, damages, or liabilities that may arise after closing. This provision offers post-closing protection for buyers against undisclosed issues.
Deal Structure & Financing
These financing and structuring terms are essential for understanding how search fund acquisitions are funded and structured.
Capital Stack
The mix of debt and equity financing used to fund an acquisition. Consists of senior debt, seller financing, and equity investments raised from search fund investors. Shows how different funding sources layer together to complete the deal.
Senior Debt
The primary debt financing in an acquisition, usually provided by banks through SBA 7(a) loans or conventional bank loans. Senior debt has first priority for repayment and often requires a personal guarantee from searchers. Usually represents 60-75% of total deal value in search fund transactions.
SBA Loans
The most common form of senior debt financing in search fund deals. The U.S. Small Business Administration (SBA) backs SBA 7(a) loans up to $5 million. These loans offer lower down payments and competitive rates for small business acquisitions, but require a personal guarantee from searchers.
Seller Note/Seller Financing
Debt financing provided by the business seller. Seller financing helps buyers to lower their cash requirements while giving sellers ongoing interest in the business’s performance. When used, it often represents 10-30% of the purchase price and carries 3-7 year terms.
Personal Guarantee
A commitment by the searcher to personally repay debt if the business fails to meet its obligations. This puts a searcher’s personal assets at risk should the business falter. It is commonly required for SBA loans.
DSCR (Debt Service Coverage Ratio)
A financial metric measuring a company’s ability to meet its debt obligations, calculated as net operating income divided by total debt service. Lenders typically require DSCR above 1.25x for approval.
Equity Rollover
A transaction structure where the current owners keep partial equity ownership in the business after the acquisition instead of receiving all cash at closing. It keeps sellers invested in the ongoing success of the company.
Earnout
A purchase price mechanism where the seller receives additional payments based on the business achieving specific performance targets after closing. Earnouts allow sellers to share in future upside and are often used when buyers and sellers disagree on valuation.
Investment & Governance Terms
These terms outline the relationships and rights between searchers, investors, and other stakeholders in search fund investments.
Board of Directors
The governing body of a corporation that oversees management and makes major strategic decisions. Search fund boards usually have 3-5 members, typically including both searcher and investor representatives, who hold monthly or quarterly meetings.
Board Seat
The right to occupy a position on the company’s board of directors, providing a formal role in the business’s governance and voting power. Major investors often receive board seats as part of their investment terms.
Advisory Board
A group of experienced business leaders who provide guidance and mentorship to searchers without having formal governance authority. Often includes industry experts, former CEOs, and specialists who advise on specific issues.
Preferred Shares
A class of ownership that receives priority regarding dividends and liquidation proceeds compared to common shares. Search fund investors usually receive preferred shares to protect their downside risk.
Common Shares
Basic ownership units in a corporation. They carry voting rights and allow participation in company profits through dividends and appreciation. Searchers typically receive common shares that represent their equity stake.
Liquidation Preference
The right of preferred shareholders to receive their investment back before common shareholders if the business is sold or liquidated. This helps investors recover their initial capital even if the business struggles, providing crucial downside protection.
Carry/Carried Interest
Additional compensation that traditional searchers receive when they successfully grow and sell the business for a profit. Typically earned in tranches at different milestones, achieved over time and based on performance. Potential carry for traditional search funds often totals 25% of post-investor equity.
Operational & Market Terms
These concepts relate to business operations, market dynamics, and value creation strategies that searchers evaluate and implement.
Industry Fragmentation
This describes a market where many small players compete, with no dominant leaders. A fragmented industry often presents opportunities for search funds to consolidate and gain market share through a roll-up strategy.
Customer Concentration
The degree to which a business depends on a small number of customers for its revenue. High concentration means more risk. Search funds usually avoid businesses where any single customer accounts for more than 15-20% of revenue.
Recurring Revenue
Revenue that is reliable and expected to continue in the future. Examples include subscriptions, contracts, or repeat purchases from loyal customers. Search funds prioritize recurring revenue because it reduces business risk, makes cash flow projections more reliable, and appeals to investors.
Sticky Customers
Customers who are unlikely to switch to competitors due to high switching costs, integration complexity, or strong relationships.
Organic Growth
Business growth achieved through internal development rather than acquisitions. Organic growth represents sustainable growth that searchers can drive through operational improvements, new products, or market penetration.
Add-on Acquisition
A secondary acquisition that complements the searcher’s original business, often sought to create synergies or expand market reach. Add-ons are a common strategy for search funds looking to continue growing after their initial acquisition is performing well.
Roll-up Strategy
An acquisition approach of consolidating fragmented industries by purchasing multiple similar businesses and combining them into a larger, more efficient operation. Roll-ups aim to take advantage of economies of scale and combined operational expertise.
100-Day Plan
A detailed action plan that sets out key priorities and initiatives for the first 100 days after acquiring a business. Focuses on meeting employees, understanding operations, implementing basic financial controls, and identifying quick wins like cost reductions or process improvements that build credibility with the team.
KPIs (Key Performance Indicators)
Specific, measurable metrics used to track business performance and desired outcomes. Examples include revenue growth, customer retention, or operational efficiency. Unlike general financial metrics, KPIs help searchers monitor progress toward strategic goals and identify improvement opportunities through measurable, manageable targets.
Deal Sourcing Terms
These terms cover how searchers find opportunities and gain access to businesses for sale.
Deal Flow
Refers to the number of potential acquisition opportunities a searcher sees over time. Searchers may need to review hundreds of businesses to find one suitable acquisition. Consistent deal flow requires systematic outreach and relationship building.
Business Broker
A professional intermediary who helps business owners sell their companies, typically focusing on smaller businesses valued under $10 million. Brokers are one common source of deal flow for search fund acquisitions.
Brokered Deal
An acquisition opportunity presented through business brokers or investment bankers who represent the seller and manage the sale process. These opportunities provide access to deals that searchers might not find on their own, but usually result in multiple buyers competing for the same business.
Proprietary Deal
An acquisition opportunity developed through direct contact with business owners rather than through brokers or intermediaries. Often results in better terms for buyers because there’s no competition from other potential acquirers, making it the preferred approach for most searchers.
Exit Terms
These terms cover how searchers hope to eventually exit and realize returns from their investments.
Exit Strategy
The planned approach to eventually selling the acquired business to realize investment returns. The sale of the business for a profit often represents the primary wealth creation event for search funds and their investors.
Financial Buyer
A buyer who purchases businesses primarily for investment returns rather than strategic synergies. Examples include search funds and private equity firms. This type of buyer looks to increase the company’s value through operational improvements and financial strategies.
Strategic Buyer
A buyer who purchases businesses to achieve strategic objectives, such as market expansion, synergies, or vertical integration. They often pay premium valuations compared to financial buyers.
Trade Sale
The sale of a business to another company in the same or related industry, often achieving premium valuations due to strategic synergies. The most common exit path for successful search fund investments.
Exit Multiple
A valuation metric that compares a company’s sale price to its annual earnings (typically EBITDA) at the time of sale. Important to search funds because earning a higher exit multiple drives the total returns searchers and investors receive.
Risk Management Terms
These terms describe the key risk categories that searchers and investors need to understand and manage throughout the search fund lifecycle.
Market Risk
The potential for losses due to changes in market conditions, competition, or industry dynamics that management doesn’t control. This type of risk can significantly impact business performance regardless of how well searchers operate the company, making industry and market analysis crucial during target selection.
Operator Risk
The risk that the searcher lacks the skills, experience, or capability to effectively manage and improve the acquired business. A key concern for search fund investors, since searchers often transition from consulting, banking, or other fields into CEO roles without prior operating experience.
Common Search Fund Acronyms
These are common acronyms and abbreviations frequently used without explanation in search fund communications and documentation.
ETA (Entrepreneurship Through Acquisition)
Another term for the search fund model and acquisition-based entrepreneurship. Increasingly used in academic and professional circles to describe the broader category beyond traditional search funds.
IOI (Indication of Interest)
A preliminary, non-binding expression of a buyer’s interest in acquiring a business. Serves as a starting point for discussions and allows searchers to gauge seller interest in moving forward. The IOI provides a high-level overview of a potential offer, usually including proposed purchase price range, transaction structure, financing sources, due diligence requirements, and timeline.
CRM (Customer Relationship Management)
Software systems used to track and manage relationships a set of contacts. Search funds often use CRM tools to help manage deal flow and track the status of their networking and outreach campaigns during the search process.
TAM (Total Addressable Market)
The total market demand for a product or service, representing the maximum revenue opportunity. It is used to evaluate growth potential and market size when assessing target companies.
LTV (Loan-to-Value)
The ratio of debt financing to total enterprise value, usually 60-75% for search fund deals. A key metric that lenders use to assess risk and determine the loan terms they offer for acquisitions.
MBO (Management Buyout)
A transaction where existing management purchases the business from the current owners. It’s an alternative exit strategy that allows management teams to gain control of the business while providing liquidity to the owners.
Conclusion & Usage Notes
This glossary covers important search fund terminology and serves as both a learning resource for newcomers and a reference for experienced practitioners.
This collection focuses on the most frequently used and searched terms in the search fund ecosystem, drawn from academic sources like the Stanford’s Search Fund Study and Harvard Business School case studies, plus conversations in search fund communities like Searchfunder.com. We prioritized terms that appear consistently across deal documents, investor presentations, and industry discussions to ensure practical relevance for anyone working in the space.
This glossary focuses on the most searched and frequently used terms in the search fund ecosystem, with periodic updates to reflect changes in the industry.
You can find more information and practical implementation of many of these concepts on our Search Fund Resources page.
Updated August 14, 2025.
