The pipeline problem
Most search fund failures happen before the LOI. Not at due diligence. Not at closing. In the search phase, when a searcher burns through 18 months chasing bad leads and runs out of qualified targets.
Deal sourcing is the job. Everything else is downstream.
A search fund operator needs to find a business generating $1M to $3M in EBITDA, run by an owner who is ready to sell, priced at a fair multiple, with transferable customer relationships and no single points of failure. That combination is rare. The median searcher reviews 300 to 500 businesses before signing an LOI. Some review more than 1,000.
The sourcing strategy determines whether you find that business in month 8 or month 22.
Three channels, one priority order
Searchers use three primary channels: direct outreach, business brokers, and intermediary networks. The priority order matters.
Direct outreach first. This is the only channel where the searcher controls access. You identify target businesses by SIC code, geography, revenue range, and employee count. You build a database of owners. You send letters, make calls, and ask one question: have you ever thought about what comes next?
The Stanford Graduate School of Business Search Fund Primer found that roughly 28% of acquisitions came through direct proprietary outreach — deals with no competing buyers and no auction process. Those deals close at lower multiples. That spread is where the economics work.
Direct outreach requires volume. A serious searcher sends 500 to 1,500 personalized letters in the first year. Response rates run 1% to 5%. Of those responses, maybe 10% become qualified conversations. Of those conversations, maybe 5% lead to an LOI. The funnel is narrow. The inputs have to be large.
Business brokers second. Brokers bring deal flow, but they also bring competition. When a business hits a broker's listing, it is priced for an auction: multiple buyers, tight timelines, less room to build the seller relationship that makes a seller note or earnout work.
That said, brokers are worth cultivating. The best ones in the $1M to $5M EBITDA range will call a trusted buyer before a deal goes to market. That call is earned through consistency: responding to packages within 24 hours, giving feedback on every deal reviewed, and closing when you say you will.
The International Business Brokers Association estimates that 70% to 80% of small businesses that sell do so through a broker or M&A advisor. Ignoring the channel costs you deal flow.
Intermediary networks third. Attorneys, accountants, wealth managers, and commercial bankers all work with owners planning exits. A referral from a trusted advisor carries more weight than a cold letter. Building these relationships takes time, but the leads arrive warm and often off-market.
How to build the target list
The target list is the foundation of direct outreach. A weak list produces weak results regardless of how good the letter is.
Start with the search fund acquisition criteria. Define the industries you will pursue and the reasons why. A thesis that reads "service businesses with recurring revenue in the Southeast" is sharper than "any profitable business." Narrower theses produce better outreach and better responses from sellers who recognize a buyer who understands their market.
From the thesis, build the database. Tools like Dun & Bradstreet, Reference USA, and NAICS-coded SBA data let you filter by SIC code, revenue estimate, employee count, and geography. List brokers like ZoomInfo add owner contact data. Expect 20% to 30% of records to be stale or incorrect. Verify before you mail. A letter addressed to the wrong person at a business that changed hands two years ago signals low effort. Sellers notice.
The goal is 1,500 to 3,000 qualified names for a two-year search. That feeds the outreach volume needed to generate consistent deal flow.
The letter that works
Direct mail to business owners follows a structure the search fund community has refined over three decades.
Lead with who you are and why you are credible. Business owners are skeptical of unsolicited buyers. A one-page letter from an operator with relevant industry experience and institutional backing lands differently than a generic template.
State the acquisition criteria clearly: revenue range, EBITDA, geography, industry. Sellers self-select. The owner who reads your criteria and thinks "that's my business" is the owner worth talking to.
Ask for a conversation, not a decision. The letter is not a term sheet. It is an introduction. The ask is simple: if you're curious about what your business is worth and what the next chapter could look like, I'd welcome a 20-minute call.
Add a handwritten P.S. Response rate research consistently shows handwritten postscripts outperform typed ones. The reason is straightforward: it signals a real person took the time.
What kills deal flow
Three things kill search fund deal flow faster than anything else.
Thesis drift. A searcher who started in business services pivots to light manufacturing in month 6 because a broker sent an interesting deal. Then pivots again. Sellers notice inconsistency. Stick to the thesis unless you have a documented reason to change it.
Slow follow-up. A seller who calls you back is signaling interest. Return the call within 24 hours. Send the NDA within an hour after the first conversation. The window is short. Owners who feel ignored move on.
Overqualification in early conversations. The first call is not the time to run a full qualification screen. Ask open questions. Understand the business and the owner's situation. Qualification comes after rapport. Pressing on EBITDA margins before you understand what the owner cares about ends deals that could have worked.
The veteran operator edge in sourcing
Patriot Growth Capital focuses on veteran operators for a specific reason. Three skills define effective deal sourcing: systematic outreach, disciplined follow-through, and building trust with people who have no reason to trust you yet. These are the same skills built in uniform.
An operator who managed logistics under time pressure or led teams in austere environments knows how to execute a sourcing process. The discipline to send 500 letters, track 1,400 conversations, and stay consistent when the pipeline is slow is not a business school skill. It is a military skill.
The ATLVets network and the veteran business community more broadly provide real advantages in sourcing. Owner-operators who built their businesses through discipline and accountability respond differently to a buyer who speaks the same language.
The numbers to track
Every searcher needs a deal sourcing dashboard. Minimum metrics:
- Letters sent — cumulative and monthly. Volume is the leading indicator of everything downstream.
- Response rate — responses divided by letters sent. A healthy rate is 2% to 4%. Below 1% signals a list or letter quality problem.
- Conversations started — phone calls and meetings with owners. Aim for 10 to 20 per month in active search.
- NDAs signed — a proxy for qualified conversations. One NDA per 8 to 15 conversations is typical.
- CIMs reviewed — Confidential Information Memoranda from brokers and direct sellers. Volume indicates active deal flow.
- LOIs submitted — the output of the entire funnel. Most searchers submit 3 to 8 LOIs before closing one.
Track these weekly. Sourcing problems compound. A month of low letter volume creates a pipeline gap 90 days later that is hard to close.
Start with the thesis, not the tools
Deal sourcing tools change. Which channels sellers respond to shifts over time. The thesis does not change.
Know the industries you want to own. Know the owner profile you are looking for. Know why you are credible to that seller. Build the list from that foundation.
The search fund model works because it brings a disciplined, full-time buyer to a market full of owners who have never thought systematically about their exit. Deal sourcing is how that buyer finds them.
Treat it like reconnaissance. Gather intelligence, identify targets, make contact, and build the relationship before you need it. That is how acquisitions get done.
