ETA in the US: The Original Search Fund Market

The United States is where the search fund model was born, and after more than 40 years of evolution, it remains the world's deepest, most mature, and most institutionalized ETA market. What began as an experimental concept at Stanford Graduate School of Business in 1984 has grown into a well-established asset class with a robust ecosystem of investors, advisors, lenders, and educational programs. The US market offers searchers unmatched access to capital, deal flow, and institutional support — but also the most competitive landscape in the world. Understanding the nuances of the American ETA ecosystem is essential for anyone considering a search in the US or benchmarking their own market against the global standard.

The history and evolution of US search funds

The search fund concept was pioneered by H. Irving Grousbeck at Stanford GSB in 1984. Grousbeck proposed a two-stage model: first, raise a small fund to finance the search for a company to acquire; then, once a target is identified, raise acquisition capital from the same investor group. The first handful of search funds were essentially experiments — MBA graduates testing whether they could identify, acquire, and operate small businesses more effectively than existing owners.

Over the following decades, the model proved remarkably successful. Stanford's Center for Entrepreneurial Studies has tracked search fund performance since the 1990s, publishing comprehensive studies that have become the definitive reference for the industry. The data has consistently shown that search funds produce attractive returns for investors — historically averaging 30-35% IRR and 4-5x return on invested capital — while providing searchers with a path to CEO-level leadership and significant personal wealth creation.

The US search fund market has grown exponentially, particularly since 2010. What was once a niche strategy pursued by a dozen graduates per year has expanded to over 100 new search funds launched annually in the US alone. This growth has been driven by the model's strong track record, the expansion of ETA curricula beyond Stanford to HBS, Wharton, Kellogg, Booth, and dozens of other programs, and the emergence of a dedicated investor class.

The academic ecosystem

The US benefits from the world's most developed academic infrastructure for ETA education. This ecosystem is a significant competitive advantage for American searchers.

• Stanford GSB: The birthplace of the search fund model. Offers dedicated ETA courses, maintains the most comprehensive database of search fund outcomes, and produces the biennial Stanford Search Fund Study. The Stanford network remains the largest and most influential in US ETA.
• Harvard Business School:Has developed a robust ETA program with case studies, dedicated faculty, and a growing alumni network of searchers. HBS searchers benefit from the school's enormous alumni base and brand recognition.
• Wharton (UPenn): Strong ETA curriculum with particular emphasis on financial modeling and deal structuring. The Wharton network is well-represented among search fund investors.
• Kellogg (Northwestern): Known for its collaborative culture and strong Midwest network, Kellogg graduates often target businesses in the less competitive Midwest and Southeast markets.
• Other programs: Booth (Chicago), Tuck (Dartmouth), Darden (UVA), Fuqua (Duke), and McCombs (UT Austin) all have active ETA communities. The proliferation of programs has both expanded the talent pool and increased competition for deals.

Traditional vs. self-funded search

The US market has seen a significant evolution in search fund structures. Understanding the differences between traditional and self-funded models is critical for choosing the right approach.

Traditional search funds

In the traditional model, the searcher raises a search fund (typically $400K-$600K) from 10-20 investors to finance a two-year search. These investors receive the right of first refusal to invest in the eventual acquisition, typically receiving a step-up on their search capital (usually 1.5x). The searcher receives a salary during the search phase (typically $80K-$120K) and earns up to 25-30% of the equity in the acquired company through a vesting schedule tied to performance.

• Pros: Dedicated capital for search, ability to search full-time, access to experienced investors as mentors and board members, proven model with extensive data on outcomes.
• Cons: Dilution (searcher typically ends up with 20-30% of equity after investor step-ups and management equity pools), investor governance requirements, two-year time pressure, geographic and industry constraints imposed by investors.

Self-funded search

In a self-funded search, the searcher finances the search phase personally (or through a small group of close contacts) and then raises acquisition capital only when a specific deal is identified. This model has grown dramatically in the US, particularly among searchers with prior operating experience or personal savings.

• Pros: Greater equity retention (often 50-80% of post-acquisition equity), full control over search criteria and timeline, flexibility to pursue smaller deals that traditional investors might reject, ability to use SBA loans for leverage.
• Cons: Personal financial risk during the search phase, limited access to institutional mentorship, narrower investor network for acquisition capital, potential for longer and more isolating search periods.

SBA 7(a) loans: the American advantage

One of the most significant structural advantages of the US market is the Small Business Administration's 7(a) loan program. This government-guaranteed lending program has become the primary financing tool for self-funded searchers and a complement to investor equity for traditional searchers.

• Loan amounts: Up to $5 million per borrower. For acquisitions, lenders typically finance 80-90% of the purchase price for qualifying businesses.
• Terms: 10-year terms for business acquisitions, 25-year terms if commercial real estate is included. Interest rates are variable, typically Prime + 1.75% to Prime + 2.75%.
• Down payment: The SBA requires a minimum 10% equity injection from the buyer. This can include investor equity, personal funds, and in some cases, seller standby notes.
• Personal guarantee: Borrowers must provide a personal guarantee, and any individual owning 20% or more of the acquiring entity must also guarantee.
• Eligibility: The target business must be a for-profit US company, meet SBA size standards (varies by NAICS code but typically under $8.5M in average annual revenue or under 500 employees), and the acquirer must demonstrate relevant management experience.

The SBA 7(a) program effectively allows searchers to acquire businesses with as little as 10% equity, creating leverage economics that are virtually impossible to replicate in European markets. This has fueled the explosive growth of self-funded search in the US.

Deal structures: LLC and LP vehicles

LLC (Limited Liability Company)

The LLC is the most common structure for self-funded search acquisitions. Its pass-through tax treatment avoids double taxation (corporate income tax plus dividend tax), and its flexible operating agreement allows for creative equity allocation, profit distributions, and governance arrangements. Self-funded searchers typically form a single-member or multi-member LLC to acquire the target business.

LP (Limited Partnership)

Traditional search funds typically use an LP structure. The searcher serves as the General Partner (GP) with management control, while search fund investors are Limited Partners (LPs) with economic rights but limited governance participation. The LP structure provides clear separation between the manager-operator and passive investors, and its tax treatment (pass-through to partners) aligns with investor preferences.

Deal sourcing channels

Business brokers

The US has a well-developed network of business brokers and intermediaries at every deal size. For search fund-sized acquisitions ($3M-$30M enterprise value), key intermediary channels include main street brokers (for deals under $5M), lower middle-market M&A advisors (for deals of $5M-$30M), and industry-specific brokers who focus on particular verticals like healthcare, technology, or manufacturing.

Online platforms

The US offers more online deal sourcing platforms than any other market. Key platforms include BizBuySell (the largest marketplace for businesses under $5M), Axial (the leading platform for lower middle-market deals, connecting searchers with advisors and company owners), BizQuest, DealStream, and industry-specific platforms. While online platforms generate high volumes of leads, the quality is highly variable, and competition from other buyers is intense.

Direct outreach

Many successful US searchers supplement broker and online deal flow with proprietary direct outreach campaigns. This typically involves identifying potential targets through industry databases (Dun & Bradstreet, ZoomInfo, LinkedIn Sales Navigator), building targeted lists of business owners, and reaching out via personalized letters, emails, or phone calls. Direct outreach yields lower response rates (typically 2-5%) but often surfaces off-market opportunities with less competition and more favorable pricing.

Typical deal sizes and multiples

The US search fund market spans a wide range of deal sizes, but the core market for ETA falls within identifiable ranges.

• Self-funded deals:Typically $1M-$5M enterprise value, corresponding to businesses with $300K-$1.5M in SDE (Seller's Discretionary Earnings). Multiples range from 2.5x to 4.5x SDE, depending on industry, growth, and customer concentration.
• Traditional search fund deals: Typically $5M-$30M enterprise value, corresponding to $1M-$5M in EBITDA. Multiples range from 4x to 7x EBITDA, with premium businesses (strong recurring revenue, low customer concentration, secular tailwinds) commanding 6-8x.
• Industry variations: SaaS and technology businesses command premium multiples (3-8x ARR or 8-15x EBITDA). Healthcare services and financial services also trade at premium multiples due to recurring revenue and regulatory barriers to entry. Manufacturing and distribution businesses typically trade at lower multiples (3-5x EBITDA).

Key US investors and networks

The US has the world's most developed ecosystem of dedicated search fund investors. Understanding the key players and their investment preferences is critical for traditional searchers seeking capital.

• Search Fund Partners: One of the most active and experienced search fund investors, with a track record spanning decades. Known for hands-on mentorship and board participation.
• Pacific Lake Partners: A dedicated search fund investment firm that has backed dozens of searchers. Known for a structured approach to searcher selection and portfolio support.
• Relay Investments: Focused on partnering with searchers to acquire and grow companies, with a reputation for providing operational support post-acquisition.
• Individual investors:Many successful former searchers have become prolific individual investors in the next generation of search funds. This “pay-it-forward” culture is a distinctive feature of the US ETA ecosystem.
• Family offices:An increasing number of US family offices are allocating capital to search fund investing, attracted by the asset class's strong returns and alignment with their long-term investment horizon.

US vs. Europe comparison

While the search fund model has spread globally, significant differences remain between the US and European markets. US searchers benefit from the SBA lending program, a deeper investor base, greater standardization of deal terms, and a larger pool of potential targets. European searchers, conversely, often face less competition, benefit from stronger seller relationships (particularly in family business cultures like Italy and Spain), and can access attractive targets at lower multiples.

• Financing: SBA loans give US searchers leverage that is difficult to replicate in Europe. European searchers rely more on commercial bank lending, seller financing, and government programs (BPI France, ICO Spain, KfW Germany).
• Deal flow: The US has more intermediaries, platforms, and data sources for deal identification. European markets require more relationship-based sourcing.
• Valuations:US multiples tend to be higher (4-7x EBITDA) compared to many European markets (3-6x EBITDA), reflecting the deeper buyer pool and more established M&A infrastructure.
• Labor law: US employment law is generally more flexible than European counterparts, making post-acquisition organizational changes easier to implement.
• Competition: The US market is significantly more competitive, with private equity firms, independent sponsors, and other searchers all pursuing similar targets.

Regulatory considerations

US acquisitions involve several regulatory considerations that searchers must navigate. Federal securities laws apply to the raising of search fund capital (typically structured as a Regulation D private placement). State-level regulations vary significantly — some states require business transfer notifications, bulk sales compliance, or specific licensing approvals. Industry-specific regulations (healthcare, financial services, insurance, government contracting) can add complexity and cost to the acquisition process. Environmental liabilities under CERCLA and state equivalents must be assessed, particularly for manufacturing businesses. Engaging experienced legal counsel early in the process is essential.

The maturation of the US market

After four decades, the US ETA market has reached a level of maturity that brings both advantages and challenges. The advantages are clear: proven model, extensive data, deep investor base, robust support infrastructure, and a large population of successful alumni who mentor new searchers. The challenges of maturity include increased competition for attractive deals, higher valuations driven by more buyers, greater sophistication among sellers and brokers (who now understand search fund economics), and the potential for the market to become “picked over” in popular industries and geographies.

Successful US searchers are adapting by targeting underserved geographies (rural and secondary markets), developing deep industry expertise to identify opportunities others miss, pursuing larger or more complex deals that require specialized skills, and building proprietary deal flow through direct outreach and industry networking. The US search fund market continues to evolve, and the searchers who will thrive in the next decade are those who can differentiate themselves in an increasingly competitive landscape while staying true to the fundamental principles that have made ETA successful for over 40 years.