2024 Stanford Search Fund Study: Key Insights

Introduction

The 2024 Search Fund Study, conducted by Peter Kelly and Sara Heston from the Stanford Graduate School of Business, offers an in-depth analysis of the outcomes of 681 search funds formed in the U.S. and Canada since 1984. This study aims to provide valuable insights into the financial returns and key characteristics of search funds as of December 31, 2023, focusing particularly on the entrepreneurs who formed these funds and their acquired operating companies.

Executive Summary

The search fund community experienced significant growth in recent years, with 94 core search funds launched in 2023—a record number. The internal rate of return (IRR) for all search funds stood at 35.1%, while the return on investment (ROI) was 4.5x, slightly down from 5.2x in 2022 (Page 2). The IRR for companies that have exited increased to 42.9% from 36.8% due to several high-return exits in 2022-2023.

Core Search Fund Model

A core search fund involves one or two individuals forming an investment vehicle with a small group of aligned investors to search for, acquire, and lead a privately held company for the medium to long term, typically six to ten years (Page 3). The long-term hold (LTH) model has emerged as a variation of the core search fund, focusing on capital efficiency and slower initial growth but accelerating over time.

Fundraising, Search, and Acquisition

In 2023, a significant number of new search funds were formed, attributed to increased education about the model and growing investor capital. Acquisitions peaked in 2021 and moderated in the following years. The number of exits remained level, with search funds consistently achieving a 57% acquisition rate over the past decade (Page 4).

Acquisition Metrics and Financial Returns

The median purchase price of operating companies decreased to $14.4 million from $16.5 million, with a 7.0x multiple of EBITDA (Page 5). The acquisition of fewer software companies, known for different growth and valuation profiles, influenced these metrics. The median number of investors in a core search fund acquisition was 16, with 12 from the original search and four new at the time of acquisition.

Demographics and Compensation

Recent searchers were predominantly aged 35 or younger, with more women participating—18% of new searchers in 2023 were female. The average search salary increased to $139k, reflecting inflation, while CEO compensation remained stable with a median salary of $190k (Page 12).

Geographic Trends

The percentage of searchers acquiring companies in the same state they searched in continued to decline, accounting for 35% of acquisitions in this study (Page 13).

Alternative Search Fund Models

Awareness of the search fund model has led to the growth of alternative approaches such as self-funded, single-investor, accelerator, and entrepreneur-in-residence (EIR) models. These models, while varying in their advantages and disadvantages, show promising growth and warrant further examination (Page 16).

International Search Funds

The international search fund community, tracked in partnership with IESE Business School, showed significant growth with 111 new funds launched outside the U.S. and Canada in 2022-2023. This included the first acquisitions in several new countries, highlighting the global expansion of the search fund model (Page 15).

Conclusion

The search fund model remains a viable path for entrepreneurs to achieve significant ownership and reach the CEO seat relatively quickly. Despite fluctuations, the returns for search funds have remained robust, driven by mentorship, collaboration, and a focus on young entrepreneurs. As the community continues to evolve, future studies will provide ongoing insights into key metrics and trends.

This comprehensive study provides invaluable insights and data for small business entrepreneurs and business acquirers, helping them understand the dynamics and potential returns of participating in a search fund. For more detailed figures and exhibits, readers can refer to the full study available at Stanford GSB’s Center for Entrepreneurial Studies website.

Figures and Exhibits

  • Figure B (Page 4): Search Fund by Activity Year
  • Figure C (Page 5): All Search Funds by Status
  • Figure D (Page 6): Industries of Acquired Companies
  • Figure E & F (Page 7): Aggregate Search Fund ROI and IRR (2011–2024)
  • Figure G & H (Page 8): Exited Search Fund ROI and IRR (2016–2024)
  • Figure I (Page 9): Search Fund Outcomes
  • Figure J (Page 10): IRR and ROI by Year of Company Acquisition
  • Figure K (Page 11): Holding Period of Exited Companies by Year of Exit
  • Figure L (Page 8): ROI by Partnership Status
  • Figure M (Page 12): Entrepreneur Equity Earned
  • Figure N & O (Page 13): Location of Search Funds vs. the Companies They Acquire
  • Figure P (Page 15): International Search Fund Acquisitions by Region, Country, & Year

Read the full study HERE.

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