Diligence··7 min read

Evaluating a Search Fund Target: A Framework

Not every good business is a good search fund target. Here is how we think about the key dimensions of target evaluation — and the questions that matter most.

One of the most common mistakes we see in early-stage searches is conflating business quality with search fund suitability. A business can be genuinely excellent — profitable, well-run, with a loyal customer base — and still be a poor search fund target. Understanding the difference is one of the most important skills a searcher can develop.

Our framework for evaluating targets starts with four questions. First: is the business genuinely transferable? Some businesses are deeply dependent on the founder's relationships, reputation, or technical knowledge. These can still be acquired, but the transition risk is higher and the timeline to full ownership is longer. Second: is the cash flow durable? We look for businesses with recurring or repeat revenue, low customer concentration, and limited exposure to cyclical demand.

Third: is there a credible path to growth? Search fund returns are driven by multiple expansion and earnings growth. A business that is well-run but structurally limited in its growth potential may generate a decent return but is unlikely to produce the outcomes that make the model compelling. Fourth: is the seller genuinely motivated? A seller who is ambivalent about selling — or who has unrealistic price expectations — will consume enormous time and energy. The best deals we have seen involve sellers who are ready to move on and who care about what happens to the business after they leave.

GG

Gallium Growth

Search fund investors backing exceptional entrepreneurs.

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