Top 7 Search Fund Investors for SMB Acquisitions

Search fund investors

Believe me, I get it. As if finding and vetting needle-in-a-haystack deal wasn’t hard enough, after you do then you have to round up all the capital needed to close on a deal.

I myself was a self-funded searcher, and know how frustrating it can be to find M&A investors who understand these deals. Speaking from personal experience, both as an acquirer of an SMB via the entrepreneurship through acquisition (ETA) model, and as an active investor in the deals.

There is good news though, search funds have ballooned in popularity enough that there are starting to be groups that solely invest in these asset classes, some only invest in traditional search funds, some only co-invest with self-funded searchers, and some will even do independent sponsors.

So… just who are the best search fund investors?

A List of the Top 7 Investors for Search Funds

  1. CapitalPad
  2. Smash Ventures
  3. Aspect Investors
  4. Anacapa Partners
  5. WSC & Company
  6. Endurance Search Partners
  7. Miramar Equity Partners

CapitalPad

CapitalPad search fund investing platform

CapitalPad is a search fund investing platform where both self-funded searchers and search fund investors can get connected to do equity deals.

It simplifies the process for both parties.

Searchers can now have an easier time finding access to equity capital and other investors who see their vision.

Investors can now have an easier time getting access to this asset class.

Pros for searchers:

  • Access to larger amounts of capital in one location.
  • Access to diverse pool of investors.
  • Have only one location to raise all needed capital.
  • No more chasing wires and signatures from a dozen investors. All investors are wrapped into one entity, so there is only one place for distributions, signatures, wires, quarterly reports, etc.

Pros for investors:

  • Get access to more self-funded search fund deals in one location.
  • Be able to write smaller checks to better diversify (since investor capital is pooled).

Raising capital for a search fund on Capital Pad

 

Requirements:

  • In order to be eligible to raise on CapitalPad searchers need to have a deal ready to go with an accepted LOI.

Investors invest on a deal by deal basis, so they need to see the presentation (also, they will not fund the initial search for “traditional” searchers).

Smash Ventures

Smash Ventures is a group of individual investors who co-invest together on search fund deals, including independent sponsors and self-funded searchers raising money on a deal-by-deal basis. The group is comprised of experienced entrepreneurs who now allocate back into the industry, supporting others the same way that they would have wanted.

They are not the largest capital stack out there, with check sizes into deals being between $50,000 (at the smallest), and $500,000 at the largest. Clearly they are best suited for search fund deals where there is a gap between the debt and equity needed to close the deal. The Smash group can help close that gap.

Smash generally deals with self-funded searchers who bring ready-to-execute deals that can be instantly evaluated. Outside of search fund investing, Smash also buys minority stakes in existing businesses, giving entrepreneurs liquidity instead of them being forced to sell in entirety.

Smash will work with search fund buyers using either SBA loans or private credit, but it’s important to note that no one in the Smash group will go over the equity threshold requiring a personal guarantee.

One bonus of working with Smash is that they fully own an online marketing agency in which they give free access to all of their portfolio companies. A nice add-on to get the new ventures improving from the start.

Pros

  • They are not a fund (no LPs), so they can move fast.
  • Have a value-added service via the marketing support.
  • They are good for searcher deals that need a little extra support to fill.

Cons

  • They do not write the largest checks out here
  • They will not invest over the personal-guarantee threshold
  • They usually only do deals that pay regular cash distributions starting in year-one.

Aspect Investors

Aspect Investors is one of Dallas-based private equity firms specializing in search funds, which collaborates with entrepreneur-CEOs to acquire and manage private companies in the $5-$50 million revenue range.

Founded in 2012 by Andy Love, who previously led Behavioral Health Group, the firm boasts a seasoned team. Andy has two decades of experience and invested capital in nearly 200 search funds. Partners Brad Buser and Mike Schmitz offer decades of private equity experience. B.A. Cullum has expertise in acquisitions, notably from ClubCorp, and holds degrees from Stanford and MIT.

All of this expertise combined can offer stable cash flows to the target company.

The firm underscores the potential of search funds, highlighting the symbiotic relationship between searchers, companies, and investors.

Success Stories:

  • Apex Technology Group was founded by a search fund backed by Aspect Investors in 2005. The company provides IT consulting services to businesses in the healthcare industry. In 2017, Apex was acquired by Kforce Solutions for $100 million.
  • Bolster was founded by a search fund backed by Aspect Investors in 2011. The company provides software that helps businesses manage their customer relationships. In 2019, Bolster was acquired by Salesforce for $1.5 billion.

Anacapa Partners

Anacapa Partners is a San Mateo-based firm founded by Jeff Stevens, using search funds to support first-time entrepreneurs.

Established in 2010, the firm emphasizes industry-neutral investments, aiming for a diverse portfolio.

They have a portfolio of 88 diverse investments and have successfully concluded funds worth $79M and $99M. The firm’s active portfolio generates an impressive $425M in annual revenue.

Anacapa’s unique approach involves closely collaborating with entrepreneurs, often recent MBA graduates or military veterans, guiding them throughout the investment process. They also offer board representation and maintain proactive relationships with their portfolio companies.

Success Stories:

      • Blueshift, which provides marketing automation software to businesses. In 2021, Blueshift was acquired by Salesforce for $1.6 billion.
      • Emsight Health, which provides software that helps hospitals manage their clinical data. In 2020, Emsight Health was acquired by Allscripts for $400 million.

WSC & Company

WSC & Company is a Charlotte-based firm established in 2012.

Specializing in lower and middle-market businesses, they focus on the business products and services sectors. With a team of 8 professionals, they’ve made 89 investments, managing 66 companies and completing 14 exits. Their recent ventures span areas like IT consulting and business software.

The firm is known for its dedication to search funds, emphasizing long-term collaboration and support for searcher success.

They prioritize private company ownership transfer and micro cap private equity returns, offering unique investment opportunities. Their approach stresses the importance of legacy, fit, and value alignment, especially for family businesses.

Success Stories:

      • Badger Stone & Trench, founded by Badge Stone, a co-founder of WSC & Company. The company provides water and sewer construction services. In 2017, Badger Stone & Trench was acquired by MasTec for $100 million.
      • Perimeter Security, also founded by Badge Stone. The company provides security software and services. In 2019, Perimeter Security was acquired by TPG Growth for $200 million.

Endurance Search Partners

Endurance Search Partners, based in Plantation, Florida, is a progressive family office established in 2009.

They collaborate with promising search fund entrepreneurs, offering mentorship, a vast network, and resources. Their goal is to nurture these entrepreneurs into exceptional leaders. With a history of over 250 search fund partnerships, the firm emphasizes flexible, innovation-oriented investment strategies.

A typical target company for them would be in growth sectors like vertical market software, healthcare, financial products, and business services.

Their unique approach allows for enduring investments and adaptable decision-making, with the firm’s capital sourced entirely from its partners.

Success Stories:

      • CanSource, which provides business insurance solutions to businesses in Canada. In 2022, CanSource was acquired by Aon for $100 million.
      • EPIC Insurance, which provides commercial insurance solutions to businesses in the United States. In 2023, EPIC Insurance was acquired by Arthur J. Gallagher & Co. for $200 million.

Miramar Equity Partners

Miramar Equity Partners (MEP), based in Dallas, is the private equity arm of Miramar Holdings, established in 2018.

Led by Kurt Leedy and Kyle Coots, MEP specializes in investing in mid-sized businesses with sustainable market positions, with a keen interest in vertical market software, communications infrastructure, healthcare, and tech-enabled services.

Their approach is distinct, as they offer patient and flexible capital, free from the constraints typical of traditional equity funds. This strategy emphasizes long-term growth and fostering deep partnerships with founders and management teams.

Their commitment is to collaborate with passionate executives, aiming for sustained growth and meaningful partnerships in the business landscape.

Success Stories:

In addition to some of the companies listed above, Miramar Equity Partners has also backed a number of other successful search funds, including:

      • AppFolio, which provides software that helps businesses manage their property management.
      • Fluidigm (now Standard BioTools Inc) which provides life sciences tools and technologies.

5 Phases of a Search Fund Investment Model

A search fund is an entrepreneurial investment model where an entrepreneur raises capital from angel investors to finance the search for a privately held company to acquire and manage. This can enable an acquisition entrepreneur to acquire an existing business or (rarely) fund their own startup venture without the need for venture capital or angel investing. If you’re like me then you’re probably thinking about things like SBA loans and SMB investors (small & medium size businesses).

The model’s concept is built around the belief that talented entrepreneurs can identify, acquire, and grow a business when given sufficient time, resources, and mentorship.

Now there are traditional search funds, as well as self-funded searchers (also called “fundless sponsors”), where the individual finds and vets the deal, takes on the debt (usually through an SBA loan), and then funds the equity injection internally and by raising money from equity investors.

Here’s a breakdown of the typical structure of a search fund:

1. Fundraising

The process begins with fundraising where entrepreneurs solicit funds from investors to cover the costs associated with finding a suitable business to purchase. This initial fund, usually in the range of $300,000 to $600,000, is typically raised from a diverse group of investors who contribute between $25,000 and $75,000 each.

2. Search Phase

Once the funds are raised, the entrepreneurs enter the search phase, which can last anywhere from one to three years. During this time, they seek a suitable small to medium-sized business to acquire. The entrepreneurs often focus on businesses in industries with which they are familiar and where they can leverage their skills and experience.

3. Acquisition Phase

When a suitable target business is identified, the entrepreneurs present the opportunity to the investors, who then decide whether to invest additional funds to finance the acquisition. If the investors agree to move forward, they will usually provide 70-100% of the equity needed for the purchase. You’ll also need to round up debt via lenders. Sometimes these are private lenders, sometimes these are SBA loans.

4. Post-Acquisition Management

After the acquisition, the entrepreneurs typically take on significant management roles in the acquired company, often serving as CEO or President. They work to grow and improve the business over a period of usually 5-10 years.

5. Exit

Finally, the entrepreneurs aim to sell the business and distribute the proceeds among the investors and themselves.

Throughout this process, investors play crucial roles, providing not only capital but also mentorship, strategic advice, and a robust network of contacts. In return for their capital and support, the investors receive a portion of the equity in the acquired company, offering them the potential for significant returns upon a successful exit.

Big Tip! Have Your Expected Deal Scenario Ready To Go

I messed this up the first time I did it, so hopefully you can learn from my mistakes and do better.

When you approach investors you really need to have THEIR expected returns already modeled out.

You should be able to clearly answer things like:

  • Expected hold time
  • Expected IRR (internal rate of return)
    • You should have numbers prepared for a base-case scenario, as well as a best-case and negative-case scenario IRR
  • The total expected MOIC (multiple on invested capital). Basically a more formal version of ROI
  • Preferred shares or common shares
  • The preferred return
  • Are you paying regular cash distributions or waiting all until the end? (Investors generally prefer regular distributions)
  • The step-up basis
  • The equity split after the preferred return is paid off.

 

How Can the Search Fund Model Help Fund Your Acquisition?

Investors play a multi-faceted role in the Entrepreneurship Through Acquisition model (ETA model). Their contributions extend beyond the provision of capital and are integral to the overall success of the venture.

Here are some key roles they play:

      • Capital Provision: The primary role of investors is to provide the necessary capital for the search and acquisition phases.
      • Mentorship: Given that many search fund entrepreneurs are at an early stage in their careers, investors often serve as mentors, offering guidance based on their own business experience. They can provide valuable insight into the process of sourcing, acquiring, and managing a company.
      • Strategic Advice: Investors in the search funds typically have extensive experience in business and investment. They can provide strategic advice on a range of issues from identifying promising industries to positioning the company for growth post-acquisition.
      • Network Access: Investors usually bring with them a rich network of contacts, which can be instrumental in sourcing deals, vetting acquisition targets, recruiting talent, and finding potential buyers at the time of exit.
      • Due Diligence and Decision Making: During the acquisition phase, investors assist in performing due diligence on the target company. Their expertise can be vital in assessing the company’s financial health, operational efficiency, and growth potential.
      • Governance: Post-acquisition, investors often continue their involvement by serving on the company’s board of directors. In this role, they contribute to the company’s strategic direction and oversight.

In return for their contributions, investors in the search funds receive equity stakes in the acquired company, providing them the potential for substantial financial returns upon a successful exit.

However, they also bear the risk if the venture does not perform as expected.

Despite this risk, many investors are attracted to the model due to the significant potential for above-market returns and the opportunity to work closely with up-and-coming, exceptional entrepreneurs.

A List of 8 Steps to Successfully Pitch Investors

Every investor is unique, and your pitch to them must be equally unique. But a successful pitch almost always includes these key elements.

1. Understand Their Investment Criteria

Before reaching out, it’s essential to understand what investors typically look for. While they might be diversifying into startups, they often have specific criteria rooted in their traditional model. This could include profitability metrics, growth potential, or industry focus.

2. Craft a Tailored Pitch

Given the unique nature of search fund investing, a one-size-fits-all pitch might not resonate. Highlight aspects of your startup that align with their investment philosophy. Emphasize long-term growth potential, the scalability of your business, and any proven traction or profitability.

3. Showcase Operational Strength

With their background in acquiring and operating companies, equity investors value operational efficiency. Be prepared to discuss your business operations in detail, from supply chain management to customer acquisition strategies. As a partner from Clear Peak Capital mentioned, “having operational strength is half the battle”.

4. Build Genuine Relationships

Unlike another investment vehicle where the relationship might be purely transactional, investors in search funds often play an active role post-investment. It’s crucial to build a genuine relationship based on trust and mutual respect. Attend industry events where this type of investor might be present, or seek introductions from mutual contacts.

5. Highlight Your Willingness for Mentorship

One of the value propositions of external investors is their mentorship. Show that you’re open to guidance and value their expertise. This openness can make your startup more attractive to them.

6. Be Transparent

Investors always appreciate transparency, especially given the hands-on nature of their investments. Be upfront about any challenges your startup faces and your strategies to overcome them.

7. Prepare for Due Diligence

If a search fund equity investor is interested, they will likely conduct thorough due diligence. Ensure your financial records, contracts, and other essential documents are in order and easily accessible.

Your Turn

While search fund investing might have been an unconventional choice in the past, today’s forward thinking startup owners recognize its potential. I spent SO much time chasing down investors that I had learned the hard way.

As you consider the next steps for your business, keep these seven search fund investors in mind. And if you need more suggestions, keep an eye on the best investing newsletters here.

Some of the investors that I worked with provided a unique blend of capital, mentorship, and operational insight could be the rocket fuel your startup needs to get off the ground and fly high.

I hope you have the same great results that I did!

Picture of Jay Maverick

Jay Maverick

Acquisition Investors for
Small Businesses

We’re capital partners for entrepreneurs acquiring cool things.
Search funds, minority stake exits, and SBA deals. Let’s chat.

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