ETAs and Search Funds

Entrepreneurship through acquisition (ETA) and the search fund model provide structured pathways for aspiring entrepreneurs to acquire and lead established businesses, serving as an alternative to traditional startups. Originally pioneered by Irv Grousbeck at Stanford University in the 1980s, this model has since gained substantial traction globally, particularly in the U.S., Europe, and Latin America. ETA now appeals to MBA graduates and early-career professionals from institutions such as Stanford, Harvard, and IESE, offering them opportunities for impactful growth, equity ownership, and operational control as CEOs. These professionals are drawn to ETA’s unique combination of stability from acquiring proven businesses and the financial upside associated with entrepreneurial ventures. MBA students study how to run a company, get the chance to do it in the real world, and then run it into the ground.

The search fund model unfolds through four key phases: raising capital, conducting a business search, managing the acquisition, and ultimately planning an exit. Initially, searchers raise capital to support the search phase, funded by high-net-worth individuals, family offices, or private equity investors. These funds cover expenses such as travel, legal fees, and salaries, allowing searchers to focus on identifying potential acquisitions. This initial phase, often intensive and involving hundreds of business contacts, demands persistence and creativity to find a target with sound financials, growth potential, and a strong strategic fit.

Once a suitable target company is identified, the acquisition phase begins, where searchers negotiate purchase terms and secure further financing. Deal structures in search funds often align the interests of investors and new owners through mechanisms like seller financing or performance-based promissory notes. Acquisition financing might come from senior debt, mezzanine funding, or equity sourced from investors and even the sellers themselves. This flexible structure allows entrepreneurs to balance risk and reward, ensuring both financial feasibility and the potential for future profitability.

Following acquisition, searchers typically assume the CEO role, driving growth and optimizing business operations over a period of three to seven years. During this operational phase, search fund entrepreneurs may focus on implementing efficiencies, exploring expansion opportunities, or refining the business’s strategic position to increase its value. Common sectors for search fund investments include healthcare services, B2B services, and niche manufacturing—industries known for their stable cash flows and loyal customer bases, which provide a foundation for growth. Effective leadership, industry expertise, and a commitment to continuous improvement are essential as search fund entrepreneurs strive to increase the business’s appeal for a future sale or recapitalization. It’s like flipping houses for finance bros.

The exit phase in a search fund lifecycle allows entrepreneurs to realize the value created during their tenure. Typical exit strategies involve selling to strategic buyers, private equity firms, or potentially engaging in a public offering. Successful exits often yield compelling returns, with many investors seeing annualized returns exceeding 30% on successful search fund investments. However, search funds are not without risk; sector volatility can impact returns, emphasizing the need for strategic flexibility and a robust operational approach.

Search funds and ETA models represent a growing segment of private equity, targeting small to mid-sized businesses with established revenue streams instead of high-growth startups. Through ETA, aspiring CEOs gain ownership and management experience in companies with proven business models. Support networks, including accelerators and academic programs, provide resources and mentorship to help ETA professionals navigate acquisitions successfully. This model’s structured, risk-mitigated approach makes ETA a compelling choice for those seeking to build a business legacy through acquisition rather than starting from scratch.

For example, a forward-thinking approach involves supporting small business owners nearing retirement. Many own profitable companies but struggle to find qualified buyers or successors. A reimagined “early retirement consultancy” model presents an ideal exit path for such owners, transforming the sale of their business from a transactional event into a retirement solution. Entrepreneurs providing flexible transition plans, creative deal structures with retirement incentives, and legacy preservation initiatives appeal to owners who may otherwise be hesitant to part with their businesses, ensuring a smooth and fulfilling transition. Let’s take these boomer businesses and beat some money out of them.

ETA and search funds exemplify how entrepreneurs today can combine acquisition with innovative approaches to achieve financial growth, industry impact, and personal fulfillment. By understanding the dynamics of these models, aspiring entrepreneurs and investors alike can explore a viable path to lasting business success. Better to be a CEO of garbage than slave it at IB.