Search Fund (Entrepreneurship Through Acquisition)

Stanford Graduate School of Business describes a search fund as an investment vehicle, conceived in 1984, through which investors support an entrepreneur's effort to locate, acquire, manage and grow a privately held company. The searcher is often an MBA graduate or mid-career manager without the capital to buy a business alone. The target is usually a stable, profitable, owner-managed company, often one whose founder is ready to retire.

The model has three stages: raise money for the search, find and buy one company, then run it as chief executive. Unlike a private equity fund, a search fund buys a single business and the searcher becomes its operator. Unlike a management buyout, the buyer is an outsider.

The search is the risky part. Stanford GSB's 2026 Search Fund Study, published in July 2026 and covering search funds in the United States and Canada, reports an aggregate acquisition rate of 58% since its first study in 1996, so a large minority of searchers never buy a company. Canadian support has grown: in September 2025 the Business Development Bank of Canada launched a $50 million Thrive Entrepreneurship Through Acquisition Fund for women acquiring businesses through search funds, management buyouts or self-funded searches.

The trade-off is ownership against support. A traditional searcher gives up more equity in exchange for a salary, a committed investor group and experienced board members. A self-funded searcher keeps more of the upside but carries the cost of the search and must raise acquisition money from a standing start, which can slow a deal when a seller wants certainty.

The search vehicle is usually a new corporation under Ontario's Business Corporations Act or the federal Canada Business Corporations Act. Search investors buy units, typically shares or notes convertible into acquisition securities, and units are securities. Under the Securities Act (Ontario), selling them requires a prospectus unless an exemption applies.

Two exemptions do most of the work:

• Accredited investor exemption. Section 73.3 of the Securities Act and National Instrument 45-106 let an issuer sell to accredited investors who buy as principal. The issuer generally files a report of exempt distribution (Form 45-106F1) with the Ontario Securities Commission within 10 days of the distribution.
• Private issuer exemption. Section 73.4 permits sales by a closely held issuer to a defined group of purchasers; see the private issuer exemption.

Each investor signs a subscription agreement confirming the exemption relied on, and the vehicle should keep a record of how each investor qualified. If investors outside Canada would control the vehicle, it may itself be a non-Canadian under the Investment Canada Act, which generally requires a notification, or a review above the thresholds, when a non-Canadian acquires control of a Canadian business.

Most search fund purchases combine several layers of money, ranked by who is repaid first:

1. Senior debt. A term loan from a bank or the Business Development Bank of Canada, secured on the target's assets and usually guaranteed by the target after closing.
2. Seller note. The retiring owner lends part of the price back through vendor financing, postponed to the bank.
3. Equity. Search investors, and outside co-investors if needed, buy preferred and common shares of the acquisition vehicle.

A government-guaranteed loan under the Canada Small Business Financing Program rarely fits, because the program excludes share purchases and assets bought by a holding company, and its total limit is $1.15 million as of October 2026.

Structure matters to the seller too. Many owners prefer to sell shares, partly to claim the lifetime capital gains exemption, while buyers and lenders often prefer assets. The letter of intent should settle structure, price, the seller note and the transition period before due diligence begins. Our buying a business in Ontario checklist covers the rest of the process, and the mergers and acquisitions practice page explains how we act for buyers.

Search fund documents follow a recognizable pattern, though every term is negotiable:

• Step-up. When a company is bought, search capital usually converts into acquisition securities at a premium to the amount invested.
• Right to fund the acquisition. Each search investor typically has a pro rata right, but no obligation, to invest in the acquisition. Investors who decline can be replaced by co-investors.
• Preferred returns. Acquisition equity is often split between preferred shares, which are repaid first and may carry a yield, and common shares.
• Searcher equity. The searcher earns a minority common stake in tranches: part at closing, part over time through a vesting schedule, and part only if investor return hurdles are met. How the stake is issued has tax consequences and should be settled with an accountant.
• Governance. A shareholder agreement gives investors board seats, approval rights over major decisions and the usual transfer restrictions.

Nadia Rahman, a former operations director in Toronto, incorporates an Ontario corporation and raises $450,000 of search capital from 12 accredited investors, filing a report of exempt distribution after closing. Nineteen months later she signs a letter of intent to buy all the shares of a Burlington HVAC services company from its retiring founder, Gerald Byrne, for $6.5 million. Gerald wants a share sale so he can claim the lifetime capital gains exemption, which rules out the CSBFP.

The purchase is funded with a $3.25 million senior term loan secured on the company's assets, a $975,000 seller note from Gerald that is postponed to the bank, and $2.275 million of equity. Under Nadia's documents, her investors' search capital converts into acquisition shares at a 1.5 times step-up. Nine of the 12 investors take up their pro rata share of the new equity, and an outside co-investor covers the rest.

Nadia becomes chief executive with a common stake that vests in three tranches. Gerald stays on for six months under a consulting agreement, and the deal closes 14 weeks after the letter of intent.