What the Search Fund Pitch Gets Wrong—Six Realities

1st Myth: “Searching Isn’t Any Harder Than It Used to Be.”

I recently listened to a podcast by Mineola Search Partners, a respected search fund investment group, where the investors seemed to dismiss the notion that increased capital has intensified the search process.

Whether this is a strategic narrative or a genuine blind spot, the basic economic principle remains: when more money chases a relatively static number of quality targets, competition surges, and returns can compress. That’s Econ 101.

Let’s look at the broader ETA ecosystem:

• Private Investment Firm Boom: According to the American Investment Council’s PE growth report, the number of private investment firms nearly doubled from around 2,300 in 2010 to approximately 4,500 by 2020.
• Explosion in PE Funds: During the same decade, the number of private equity funds skyrocketed from 6,600 to 19,000.
• AUM Growth: Private equity Assets Under Management (AUM) ballooned from $1.7 trillion in 2010 to over $4.5 trillion by 2020.
• Rise of Family Offices: Family offices, increasingly engaging in direct deals, saw their numbers triple between 2019 and 2023, as reported by Wealth Briefing.

And here’s the crucial consequence: this deluge of capital isn’t just staying upmarket. It’s inevitably dripping down, intensifying competition for smaller deals. That $2M EBITDA plumbing company you’re eyeing? It’s suddenly on the radar of other searchers, well-funded family offices, and “PE-lite” investors, all at the same time.

2nd Myth: “Search Fund Returns Are Universally Awesome.”

The way you’re taught returns is misleading.

The Stanford Search Fund Study is often cited as gospel: the median IRR is 35.1%, and everyone wins. But read the fine print: that IRR is pre-tax and based on gross investor returns. You, the searcher, don’t get credit for tax distributions, so your carry is calculated on very different terms.

Average searcher gets ~$6M, and the median gets ~$2.5M— which sounds great until you remember that half of all searchers end up with less than $2.5M, and many walk away with little or nothing after years of effort and risk. The headline numbers get quoted over and over. The fine print? Not so much.

To be fair to investors, it’s not uncommon for searchers to not make tax distributions, which saddles them with a real tax burden but doesn’t get them any additional return.

3rd Myth: “Your Capital is Expensive, But Manageable.”

You should already know your cost of capital is high—but it’s probably even worse than you realize.

If your investors are targeting a 35% IRR over a 5-year hold, for simplicity, let’s assume no distributions; they need a 4.5x return on their capital. Once you include your carry, the business has to generate closer to 5.7x for an individual and 6x for partners to make the math work. And remember, tax distributions don’t count toward that total. This means you are getting something like 7-8.5x to get your full carry.

Compare that to the rest of private equity: most funds underwrite to a ~2x net return, maybe 2.5x gross; this far into the lower middle market, maybe it’s a bit higher. You’re being asked to deliver venture-style returns on lower-middle-market companies that may not grow more than 5-10% a year.

Don’t misread this as “feel bad for the searcher”—you’re asking for more equity than many seasoned operators and private equity investors get. But let’s stop pretending your capital is simply expensive—it’s just crazy. I’ve also been told searchers are sometimes awarded all their equity even if they didn’t quite hit all the targets, but that’s far from guaranteed.

4th Myth: “There Are Hundreds of Thousands of Targets.”

Some investors paint a picture of abundant opportunity, citing millions of small businesses in existence and assuring you there’s “no shortage of opportunity.” They might encourage a broad, opportunistic approach.

While it’s true there are millions of small businesses, the number that are truly viable for a typical search fund acquisition is drastically smaller. Certain investors are refreshingly honest, framing search as finding a “diamond in the rough.” Hold onto those advisors.

Let’s apply some realistic filters to the “millions of businesses” claim:

Sure, there are millions of small businesses. But let’s talk about what makes a business viable for a searcher:

• Right Size: Typically, searchers target businesses with $1.5M–$5M in EBITDA (though this can vary). This immediately culls the herd.
• Good Industry & Macro Tailwinds: You need a business in a stable or growing industry, not one facing secular decline.
• Durable Business Model: Ideally, this means recurring revenue, strong customer relationships, and defensible market positioning.
• Owner-Operated & Willing to Sell: The owner needs to be ready for a transition and open to the search fund model. Many aren’t.
• Affordable Price: The valuation needs to be something a searcher, with their capital structure, can actually afford. This is a huge constraint.

Let’s try some rough, illustrative math:

• Start with, say, 300,000 businesses in a plausible size range (this is generous).
• Maybe half (150,000 businesses) are in industries that generally make sense for searchers.
• Assume an average founder sells every 10 years → 10% annual turnover (15,000 businesses).
• Perhaps one-third of those 5,000 businesses would consider selling at a price/structure a searcher can realistically offer.
• Of those, maybe 25–50% (1,250–2,500 businesses) have the recurring revenue, strong fundamentals, and clean financials that searchers prioritize.

Suddenly, your 300,000 theoretical targets shrink to a few thousand viable prospects nationwide at best. Now, how many of those fit your specific industry thesis (e.g., B2B SaaS, home healthcare, specialized manufacturing)?

You absolutely still have a shot, but you’re not swimming in a vast ocean of easy pickings. This is especially true as the number of searchers, independent sponsors, family offices, and PE-lite firms all vying for these same assets continues to grow.

5th Myth: “Just Find an Untapped Niche.”

A common piece of advice is to “find a niche” that others have overlooked—some quiet corner of the economy too small or obscure for traditional PE, yet perfect for a searcher.

This sounds great in theory, but it’s a tough directive to execute. The truth is…

• If an industry has a conference, investors are already there.
• If it comprises a few thousand companies, you’re almost certainly not the first to analyze it.
• If there are data vendors covering the space, it’s already being scraped, screened, and likely contacted.

The romantic notion of discovering a vast, completely overlooked niche that’s perfectly sized for a search fund and somehow devoid of competition is largely a fantasy. Yes, underplayed or less consolidated industries exist.

There are sectors where the “smart money” hasn’t yet driven valuations to the moon. But don’t mistake “under-followed” for “empty white space.” You will almost certainly face competition, either directly from other searchers or indirectly from other capital providers.

6th Myth: “Ignore the Brokered Channel – Go Proprietary or Bust.”

The wisdom from many investors is to go proprietary or bust. And yes, proprietary deals are often cleaner, cheaper, and better. But let’s not act like brokered deals are worthless.

Most business owners who’ve built something worth buying are smart. To get to $1.5M+ in earnings, they’ve had to be. So when they decide to sell—possibly the biggest financial decision of their life—they’re not just picking the first searcher who cold emails them. They hire brokers. They run processes. They want multiple bids.

Think about it: most business owners who have successfully built something valuable enough to sell (e.g., a business generating $1.5M+ in earnings) are savvy individuals.

They’ve made countless smart decisions to get their business to that point. So, when they approach what is likely the single most significant financial transaction of their lives—selling their company—why wouldn’t they seek professional representation? They hire brokers. They want to run a structured process. They, quite rightly, want multiple bids to ensure they’re getting fair value.

This doesn’t automatically mean you can’t win in a brokered process, nor does it mean these deals are “low-quality” by default. It simply means you need to be prepared for a different dynamic.