Exploring MBA Search Funds: A Smart Investment Strategy

Maybe you considered a startup, but starting from nothing feels like a huge risk. This is where MBA search funds present a different kind of opportunity. Imagine buying an existing, profitable company instead of building one.

You become the CEO overnight, with real customers, real revenue, and a team already in place. It’s a challenging path, for sure, but it’s one that a growing number of entrepreneurial MBA grads are choosing over traditional corporate roles. These MBA search funds offer a faster route to leadership and the chance to control your own professional destiny.

Table of Contents:So, What Exactly Is a Search Fund?A Path Forged Decades AgoHow One MBA Grad Bought a BusinessFrom a Corporate Job to a New IdeaStarting the Search and Raising the MoneyThe Hard Work of Finding a BusinessChanging Course and Finding the OneLife After the Deal: The New CEODay One on the JobThe Heavy Pressure to GrowIs This Path for Everyone?What Makes a Good Search Fund Company?Frequently Asked QuestionsWhat’s the difference between a traditional search and a self-funded search?How are search fund investors compensated?Are search funds only popular in the US?Do you need an MBA from a top school like Stanford or Harvard?ConclusionSo, What Exactly are MBA Search Funds?

The idea is straightforward but powerful. A MBA search fund is an investment vehicle used to pursue entrepreneurship through acquisition. This approach allows an aspiring entrepreneur to buy an existing company instead of starting one from scratch.

This journey usually happens in two main stages. First, you raise a small amount of capital from a group of investors to begin the search phase. This initial money is not for buying the business itself but to fund your search, covering your salary and expenses for up to two years while you look for the right target company.

Once you find a great business and the owner agrees to sell, you go back to your investors. This time, you raise a much larger round of funding to actually purchase the company. You then step in as the new CEO, ready to run and grow the small business.

This fund model contrasts with a self-funded search, where an individual uses their own capital or a Small Business Administration (SBA) loan. The traditional MBA search funds model provides mentorship and a network from experienced investors, which can be invaluable.

A Path Forged Decades Ago

This is not a new fad. The concept of search funds has been around since 1984, originating with Professor H. Irving Grousbeck at Stanford Graduate School of Business. He saw it as a practical path to entrepreneurship for students from top degree programs.

For years, it was a niche concept known only in small circles at elite institutions like Stanford Graduate School and Harvard Business School. But things have started to change as the asset class has matured. According to a comprehensive search fund study from Stanford, interest and investment in search funds have exploded, especially in recent years.

More MBA graduates see it as a legitimate and exciting alternative to a predictable corporate career on Wall Street. As search funds gain momentum, more resources and formal entrepreneurial studies have developed around them. These funds are now seen as a serious route for entrepreneurial acquisitions.

How One MBA Grad Bought a Business

The best way to understand this is to see how it works in the real world. Let’s look at the story of Dan Schweber. His journey shows the highs and lows of using a search fund to become a CEO.

From a Corporate Job to a New Idea

Dan Schweber felt fed up with the corporate world. He worked as a healthcare consultant and then at a small startup, but he learned that he wanted to call his own shots. This desire led him to an executive MBA program at Columbia.

He was thinking about startup ideas but felt the risks were too high for an aspiring entrepreneur like himself. Then he stumbled upon a class about MBA search funds. The concept immediately clicked for him.

By the end of the first day, he knew he had found his path forward. He realized he didn’t need to invent a business from scratch; he could buy one that was already working. This idea was a complete game-changer for his entrepreneurial MBA focus.

Starting the Search and Raising the Money

With a year left in his program, Dan started preparing for his search fund investment. His first big task was to raise his search capital. This money would support him during his full-time hunt for a business to buy.

He created a list of search fund investors he found online and started cold-emailing them. At first, he felt nervous asking for money with little management experience. But he quickly learned that investors were looking for ambitious people like him to back, often relying on faculty faculty recommendations from business school programs.

In a few months, he successfully raised $480,000. This fund would give him a salary for two years and cover all his expenses. He now had the resources he needed to quit his job and begin his company search in earnest, supported by investors who would eventually become key board members.

The Hard Work of Finding a Business

Finding the right business is a numbers game that demands a lot of effort and a structured search process. Dan created a detailed plan to track his outreach. His goal was to find a company, and he worked backward to figure out the steps.

He estimated he needed to email 4,800 privately held businesses a year. This would hopefully lead to 500 introductory calls. From those calls, he hoped to get about 50 meetings with owners who might be serious about selling.

The process was grueling, and he faced constant rejection. Most of his emails were met with silence. When an owner did respond, they often weren’t serious about selling, making the time spent feel wasted. The emotional toll was heavy, and some days he felt like giving up entirely.

Changing Course and Finding the One

After months of searching in the healthcare industry, Dan made a big change. He decided to focus on home and commercial services instead. He believed more people were willing to pay for these types of services, which often generate strong, predictable cash flow.

One day, he was searching Google Maps for HVAC companies near Washington, D.C. and saw a company called Atlantic Duct Cleaning. He sent an email to the owner, Tom Keys. Then he sent another, and another, and another.

After eleven emails with no response, he finally got a call. The owner was tired of suitors who weren’t serious. Dan’s persistence stood out, so he drove three hours the very next day to see the business in person, and a relationship began to form.

Life After the Deal: The New CEO

Buying the business is only the beginning. The real work starts the day you take over as the new managing partner. The transition from searching to leading presents a whole new set of challenges and responsibilities.

Day One on the Job

Dan Schweber knew he had to earn his team’s trust. On his first day, he told his new staff he was there to help them grow. He showed up at 7 a.m. every morning and went on duct cleaning jobs with his technicians to learn the trade from the ground up.

He spent time getting to know his employees. He listened to their ideas and learned from their experience. This humility was important for a new, young boss leading a team of veterans who were skeptical of a new owner with a business school background.

The Heavy Pressure to Grow

Investors in MBA search funds expect a return. They don’t back a new CEO just to keep the business running as is. They want significant growth to achieve strong financial returns on their search fund investment vehicle.

Dan’s goal was ambitious: to grow Atlantic from $4 million in annual sales to $25 million by 2028. This pressure meant he had to start making big changes quickly. He hired a sales team and new managers and invested in a bigger headquarters to support the expansion.

These moves were expensive and risky, but necessary to hit his growth targets and deliver returns years post-acquisition. He also had to make tough decisions. Firing people is never easy, especially people you hired, but he learned that he had to hold his team accountable to drive the business forward.

Is This Path for Everyone?

The traditional search fund path isn’t for everyone. The statistics show both incredible highs and significant lows. Many searchers never even find a business to buy, exhausting their initial capital and time spent searching.

Of those who do buy a company, the outcomes vary wildly. About 31 percent end up losing money for their investors, according to the Stanford search fund study. A business can be hit by a recession or an issue missed during the sale process, and the pressure is immense.

You are suddenly responsible for a large loan and for the livelihoods of your employees. It’s a journey that can test your confidence in every way imaginable. Many new CEOs face moments of serious self-doubt, a topic often discussed in case studies at schools like Harvard Business.

Pros of the Search Fund PathCons of the Search Fund PathDirect path to a CEO role after business school.High-pressure environment with investor expectations.Opportunity to run and grow an established business.Significant financial risk for you and your investors.Access to mentorship from experienced investors.The search process can be long and emotionally draining.Potential for significant long term financial rewards.No guarantee of finding a suitable company to acquire.Avoids the uncertainty of building a startup from scratch.Responsibility for employees’ livelihoods from day one.

What Makes a Good Search Fund Company?

Successful searchers often look for businesses in overlooked corners of the economy. Think about services that are necessary but not very glamorous. This could be a car wash, a plumbing company, or a dumpster rental service.

These businesses often have loyal customers and produce steady, predictable revenue. Healthy profit margins and stable cash flow are exactly what makes them attractive targets for MBA search funds. They are often less appealing to traditional private equity, which may look for larger, high-growth tech companies.

These ideal targets are often owned by people looking to retire. The retiring owners care about their legacy. They want to find a buyer who will take care of the company and its employees, not a corporate raider that might strip it for parts. Some acquisitions may also involve simple real estate holdings, but the main focus is always the operating business.

An ideal target company typically has the following characteristics:

A history of stable and predictable profitability.Recurring revenue from a diverse customer base.Operations within a fragmented industry with room for growth.A retiring owner who is motivated to sell for non-financial reasons.A simple, understandable business model that isn’t dependent on rapidly changing technology.Low capital expenditure requirements, allowing for strong free cash flow.

Frequently Asked Questions

As search funds have become more popular, many aspiring entrepreneurs have questions. Here are answers to some of the most frequently asked questions about this path. These should provide more clarity if you are pursuing search.

What’s the difference between a traditional search and a self-funded search?

A traditional search fund involves raising a dedicated pool of capital from investors to fund your search expenses and salary. These investors get the right of first refusal to invest in the acquisition. This model provides significant mentorship from experienced board members.

A self-funded search, by contrast, means the entrepreneur uses their own savings or loans to cover search costs. They have more flexibility and retain more equity post-acquisition. However, they lack the built-in network and guidance that comes with a traditional search fund.

How are search fund investors compensated?

Investors in the initial search capital typically receive a step-up on their investment. This means their initial capital is converted into equity in the acquired company at a premium, often 50%. They also get pro-rata rights to invest in the acquisition itself.

The goal for investors is to achieve significant financial returns over the long term. Their success is tied directly to the success of the new CEO and the growth of the company. The overall fund model is structured to align the interests of the searcher and the investors.

Are search funds only popular in the US?

While the model originated at Stanford and gained popularity in North America, it is no longer just a domestic phenomenon. International search funds are becoming increasingly common. The model has been successfully adapted in Europe, Latin America, and other parts of the world.

The number of international search funds formed has been growing steadily. The core principles of entrepreneurship through acquisition are universal. However, an international search requires a deep understanding of local business culture, regulations, and market dynamics.

Do you need an MBA from a top school like Stanford or Harvard?

An MBA from a top-tier business school like Stanford Graduate or Harvard Business School can certainly help. These degree programs offer strong networks, relevant entrepreneurial studies, and credibility with investors. Many of the most well-known case studies come from these institutions.

However, it is not an absolute requirement. A growing number of successful searchers come from a variety of backgrounds and other excellent MBA programs. What matters most to investors is your drive, business acumen, persistence, and a clear vision for the search process and beyond.

Conclusion

For driven MBA graduates who feel trapped by the corporate ladder, the MBA search funds model is an exciting option. It is a path to business ownership that avoids the high-risk, all-or-nothing nature of starting from zero. You can take a successful small business and apply your skills to make it even better.

This path demands incredible persistence and a stomach for risk. The search is long, the time spent can feel endless, and the pressures of being a CEO are real. You must be prepared for the challenges that come with being in charge.

But for those who succeed, the rewards can be life-changing, both financially and personally. A search fund provides a platform for an entrepreneurial mba grad to truly control their own destiny. It’s a chance to build equity, lead a team, and make a tangible impact on a business and its community.

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