Selling Your Business to a Search Fund Buyer: How the Process Works

You've been talking to a search fund buyer. They seem smart, well-funded, and genuinely interested in running your business. But the process feels different from what you expected — and you're not sure what's normal.

Selling to a search fund buyer is structurally different from selling to a strategic acquirer or private equity firm. Here's how the process typically works, what to expect at each stage, and where to protect yourself.

Stage 1: Initial Contact and Screening

Most search fund deals start with outbound — the searcher finds your business through a broker listing, industry database, or cold outreach. They'll request a call to learn the basics: revenue, profitability, industry, growth trajectory, owner involvement, and reason for selling.

At this stage, the searcher is evaluating whether your business fits their criteria. They're looking at dozens of companies simultaneously. Expect general questions, not deep dives.

What you should do: Ask about the searcher's background, investors, timeline, and how many other businesses they're evaluating. Get a sense of whether they're serious and capitalized. A good searcher will be transparent about their process and funding.

Stage 2: Mutual Interest and NDA

If both sides see potential, you'll sign a mutual NDA and share more detailed financial information — typically 3 years of P&L statements, tax returns, and a summary of key business metrics (customer concentration, employee count, revenue mix).

The searcher will build a financial model to assess valuation and returns. They may share preliminary valuation thoughts to see if you're in the same range before investing significant time.

What you should do: Share enough information to demonstrate the opportunity, but don't hand over your entire data room yet. You want to validate the searcher's seriousness before giving them everything.

Stage 3: Letter of Intent (LOI)

If the searcher wants to move forward, they'll submit a Letter of Intent. The LOI outlines the proposed deal terms:

• Purchase price (usually expressed as a multiple of SDE or EBITDA)
• Deal structure — how much is cash at close, seller financing, and earnout
• Exclusivity period — typically 60–90 days where you agree not to talk to other buyers
• Due diligence scope — what they plan to review
• Transition expectations — how long you'll stay post-close and in what role
• Key contingencies — financing, landlord consent, customer retention, etc.

Key LOI Negotiation Points

Purchase price. Understand whether the price is based on trailing EBITDA, adjusted EBITDA, or SDE — and for what period. A $4M price on $1M trailing SDE is very different from $4M on $1M adjusted EBITDA.

Seller financing. Most search fund LOIs include 10–20% of the purchase price as a seller note (typically 5–7 year term, 5–7% interest, with a standby period). This is standard for search fund deals. Negotiate the terms — subordination, interest rate, payment schedule, and acceleration triggers.

Exclusivity length. Searchers want 75–120 days of exclusivity. Push for 60–75 days. A good searcher can close in 60–90 days. Long exclusivity with no deposit gives them optionality at your expense.

Earnest money. Insist on a meaningful deposit (3–5% of purchase price) that goes hard (non-refundable) after a defined period. This shows commitment and protects you from a searcher who ties you up and then walks away.

Transition period. Search fund buyers almost always want the seller to stay for 6–24 months post-close. Define your role, compensation, hours, and what triggers your exit. Get this in writing in the LOI — not left to negotiate later.

Stage 4: Due Diligence

Once the LOI is signed, the searcher and their team will conduct thorough due diligence. Search fund diligence is typically more hands-on than a PE deal because the searcher is personally going to run the business. Expect them to want to understand everything.

What They'll Review

Financial diligence:

• 3–5 years of financial statements and tax returns
• Monthly revenue and expense detail
• Customer-level revenue analysis
• Quality of earnings analysis (sometimes formal, sometimes done by the searcher and their investors)
• Working capital analysis

Operational diligence:

• Employee roster, compensation, benefits, and tenure
• Key customer and vendor contracts
• Lease agreements and facility details
• Technology systems and tools
• Organizational chart and management structure
• Standard operating procedures

Commercial diligence:

• Customer interviews (usually 5–10 customers)
• Market size and competitive landscape
• Sales pipeline and growth opportunities
• Customer churn and retention data

Legal diligence:

• Corporate documents and ownership structure
• Litigation history
• IP and licensing
• Regulatory compliance
• Insurance coverage

How to Prepare

The best way to survive due diligence is to prepare before you're under LOI. Organize your data room, clean up your financials, and identify any issues that could surface. Surprises during diligence kill deals.

Stage 5: Financing

This is where search fund deals can get complicated. Unlike PE firms (which have committed capital), search fund buyers need to raise their acquisition financing after signing the LOI. Typical financing sources:

Investor equity (50–70% of deal value). The searcher's existing investors get the right to invest pro-rata, and new investors may be brought in. This process usually takes 2–4 weeks after diligence is substantially complete.

SBA 7(a) loan (20–40%). Many search fund deals use SBA financing because it allows high leverage with favorable terms. SBA loans require lender approval, business appraisal, and personal guarantees from the searcher. This adds 30–60 days and has its own diligence requirements.

Seller note (10–20%). Your seller financing fills the gap and signals confidence in the business to other capital providers.

The risk: If the equity raise or SBA approval falls through, the deal doesn't close. This is the biggest structural risk in search fund transactions. Mitigate it by understanding the financing plan upfront and having earnest money that compensates you if the deal fails for financing reasons.

Stage 6: Purchase Agreement and Closing

Once diligence and financing are confirmed, the lawyers draft the definitive purchase agreement (APA or stock purchase agreement). Key terms beyond price:

Representations and warranties. You'll make statements about the condition of the business — accuracy of financials, no undisclosed liabilities, status of contracts, etc. These survive closing for 12–24 months, meaning you can be liable if something you represented turns out to be false.

Indemnification. Defines your financial exposure if reps are breached. Negotiate a cap (typically 10–20% of purchase price) and a basket (minimum threshold before claims can be made).

Non-compete. Standard in any business sale. Typically 3–5 years within your geography and industry. Reasonable non-competes are enforceable; overly broad ones may not be — but negotiate scope carefully.

Working capital adjustment. The deal will include a working capital target — if actual working capital at closing is below the target, the purchase price adjusts down. This is a common source of post-closing disputes, so get it right.

Closing conditions. Landlord consent, key employee retention, customer contract assignments, regulatory approvals. Identify these early and start the process before the closing date.

Timeline: How Long Does It Take?

A typical search fund deal takes 90–150 days from signed LOI to close:

• LOI negotiation: 2–4 weeks
• Due diligence: 4–8 weeks
• Financing: 3–6 weeks (overlapping with diligence)
• Legal documentation: 3–5 weeks (overlapping with financing)
• Closing: 1–2 weeks

Delays usually come from SBA underwriting, investor commitments, or diligence issues that surface late. Build buffer into your planning.

What Happens After Closing

The searcher becomes CEO. Your role shifts to whatever was negotiated in the transition agreement — could be advisory, operational, or a clean exit after a defined handoff period.

Most search fund buyers are motivated, hardworking, and invested in the success of the business. They're staking their career on it. That said, they're also learning on the job. If you care about the legacy of what you built, spend the transition period transferring knowledge, introducing key relationships, and setting the new owner up for success.

Is a Search Fund Buyer Right for You?

Search fund buyers are well-suited for businesses in the $1M–$5M SDE range where the owner wants to sell to someone who will personally run and grow the company. They bring institutional capital, strong work ethic, and long-term commitment.

The tradeoffs: seller financing is almost always required, the process can be slower than other buyer types, and financing risk is real.

If you're evaluating a search fund buyer — or deciding between a searcher, PE firm, or strategic acquirer — schedule a call and I'll help you think through your options.