According to the 2024 Stanford Search Fund Study, the average search fund entrepreneur who exited a business walked away with $5.7 million in equity. Most people read that number and start calculating backwards from their own deal size. That is the wrong starting point. The right starting point is the waterfall, because the waterfall decides whether any of that carry ever reaches the operator.
Search fund operators spend a lot of time negotiating carry percentage. Twenty-five percent. Thirty percent. The two-person team splitting it fifteen and fifteen. Those are real conversations worth having. But the carry percentage is not the number that determines your outcome. The structure above the carry is what determines your outcome.
Here is how it actually works.
The waterfall before you see a dollar
In a traditional search fund, the exit waterfall runs in strict priority order. Senior debt gets repaid first. Then investors receive their preferred return, compounded annually at a rate that is typically 8%. Then investors recover their invested capital. After all of that is satisfied, the operator participates in remaining proceeds through the carry.
Run the math on a real example. A search fund raises $600,000 in search capital from 14 investors. At acquisition, those same investors contribute $4 million in equity alongside $10 million in debt to close a $14.4 million deal, the median acquisition size in the Stanford 2024 study. The operator holds 25% carry. The company is sold five years later at $21 million enterprise value.
Debt is repaid at closing from sale proceeds: $8 million remaining (assuming paydown over five years). Investors receive their preferred return first: $4 million at 8% compounded for five years equals approximately $5.87 million. That satisfies the 8% hurdle. Remaining proceeds after preferred return and capital return: $21M minus $8M debt minus $5.87M preferred return equals $7.13 million. The operator receives 25% of that: approximately $1.78 million.
That is not $5.7 million. It is not 25% of a $21 million exit. It is $1.78 million on a deal that took seven years of your life from the start of the search to the close of the sale.
Whether that number is good or bad depends entirely on the alternatives you walked away from. But the operator who did not model this before signing the fund documents is the operator who will feel blindsided by the wire amount.
How carry is structured
In a traditional search fund, carry runs 20 to 30% of the fully diluted equity in the acquisition entity. A solo searcher typically receives 25%. A two-person team typically receives 30%, split equally at 15% each. These are gross figures before the preferred return hurdle.
Self-funded searchers operate under entirely different economics. They retain 60 to 80% of common equity at the cost of carrying acquisition risk themselves, without investor backing. The tradeoff is real: more equity upside, more personal capital at risk, and no investor network to support the search.
Carry vests in tranches. The structure varies by fund, but a common pattern allocates one-third at closing as a reward for completing the search and deal, one-third over a time-based vesting schedule across four to five years, and one-third tied to performance milestones. This structure is designed to keep the operator focused on the business after acquisition, not on the next deal.
Vesting schedules do not automatically accelerate on a sale unless the operating agreement contains an explicit acceleration provision. An operator who signs a deal at year three and has not yet fully vested may forfeit a meaningful portion of carry at close. Read the vesting schedule before the LOI. Confirm whether acceleration exists.
Good leaver and bad leaver provisions
Every search fund operating agreement contains good leaver and bad leaver provisions. Most operators treat these clauses as boilerplate. They are not boilerplate. They determine what you keep if you leave before the company exits.
A good leaver, typically someone who departs through retirement, disability, or mutual agreement, generally retains vested carry and forfeits unvested carry. A bad leaver, typically someone terminated for cause or who resigns to join a competitor, generally forfeits both vested and unvested carry. The line between the two categories matters more than the percentages in the carry schedule.
The definition of "cause" and the definition of "competitor" are often imprecise in operating agreement drafts. Investors and operators have different interests in how broadly these terms are written. The investor drafts them broadly to protect capital. The operator should negotiate them narrowly to protect earned equity. Most operators do not push back on these provisions during the term sheet phase. They push back during a dispute, which is too late.
At Patriot Growth Capital, we review these provisions before any operator signs a term sheet. We have seen equity outcomes destroyed by ambiguous bad leaver language that could have been tightened in a single revision.
What the Stanford data actually shows
The 2024 Stanford study analyzed 681 search funds formed in the United States and Canada since 1984. The aggregate pre-tax IRR to investors across all funds was 35.1%. Return on invested capital was 4.5x. For companies that exited, the IRR rose to 42.9%.
Those are investor returns, not operator returns. The $5.7 million average operator equity outcome comes from a subset of funds with positive returns, and reflects the right tail of outcomes, not the median. Approximately 40% of search fund acquisitions do not produce a positive return for the operator. A deeper look at how investors underwrite these deals is in our piece on search fund investor returns.
The 2024 IESE International Search Funds study, covering non-U.S. funds, found an overall investor ROI of 2.0x and an IRR of 18.1%. International returns lag domestic by a meaningful margin, driven by differences in deal availability, legal structure, and exit market depth.
Ninety-four new core search funds launched in 2023, a record number. The pipeline is growing. That means more competition for deals in the $5 million to $15 million EBITDA range where most search fund targets sit. More competition compresses acquisition multiples upward, which compresses operator equity outcomes.
The variables that move the number
Three variables determine whether the operator carry lands at $1.5 million or $8 million on a comparable deal size.
First: hold period. The preferred return compounds annually. A five-year hold at 8% produces a 1.47x preferred return multiple on investor capital. A seven-year hold produces 1.71x. Every additional year the company takes to exit increases the hurdle the waterfall must clear before carry participates.
Second: EBITDA growth. The exit multiple is applied to the EBITDA at exit, not at acquisition. An operator who takes a $2 million EBITDA business to $4 million over five years and exits at the same 7x multiple doubles the enterprise value. That EBITDA growth is the primary engine of operator equity creation. Operational improvement is not optional in this model. It is the model.
Third: entry multiple. A business acquired at 8x EBITDA requires more value creation to generate the same operator return as one acquired at 5x EBITDA, assuming the same exit multiple. The acquisition discipline applied at the front end of the deal determines the floor on operator outcomes.
What veterans bring to this equation
The search fund model is fundamentally an operator model, not a financial engineering model. The operators who outperform are the ones who can run the business, not just analyze it. Process discipline. Team accountability. Decision-making under incomplete information. These are not traits you acquire in business school. They are traits built under consequence.
Veterans entering ETA are not starting from zero on the operational side. They are starting from a position most MBA searchers will spend years trying to develop. The equity outcome is a function of what you do with the business after you own it. The waterfall mechanics are fixed in the documents. The operational performance is not.
The operators who produce $5 million to $10 million equity outcomes from search fund acquisitions are the ones who understood the waterfall clearly, negotiated the carry terms precisely, and then spent five years doing the actual work of building a better business than the one they bought.
Know the math. Protect the documents. Then go run the company.
Frequently Asked Questions
How does the waterfall work before a search fund operator receives any carry?
The exit waterfall runs in strict priority: senior debt is repaid first, then investors receive their preferred return compounded annually, then investors recover their invested capital. Only after all of that is satisfied does the operator participate through carry. The operator's percentage applies to what remains, not to the total enterprise value at exit.
How does carry typically vest in a search fund operating agreement?
A common vesting pattern allocates one-third at closing for completing the search and deal, one-third over a time-based schedule across four to five years, and one-third tied to performance milestones. Vesting schedules do not automatically accelerate on a sale unless the operating agreement contains an explicit acceleration provision. An operator who has not fully vested at the time of a deal may forfeit a meaningful portion of carry at close.
What do good leaver and bad leaver provisions determine for an operator?
These clauses determine what carry an operator keeps if they leave before the company exits. A good leaver typically retains vested carry and forfeits unvested carry. A bad leaver typically forfeits both vested and unvested carry. The definitions of cause and competitor are often imprecise in operating agreement drafts, and an operator who does not negotiate them narrowly during the term sheet phase may lose earned equity in a dispute.
What three variables most directly determine how much carry an operator receives?
Hold period matters because the preferred return compounds annually, raising the hurdle the waterfall must clear before carry participates. EBITDA growth matters because the exit multiple is applied to earnings at exit, not at acquisition, making operational improvement the primary engine of equity creation. Entry multiple matters because a business acquired at a high multiple requires more value creation to generate the same operator return.
