Do Search Fund CEOs Improve Performance?
The premise of the search fund model is that a prospective CEO raises capital from investors to acquire and run an existing business, improving it before selling at a higher price. But an analysis by search fund expert A.J. Wasserstein and accounting scholar Jacob Thomas finds that most gains come from selling companies at higher prices relative to their earnings, not from improving margins or efficiency.
What’s the conventional wisdom about how entrepreneurship through acquisition creates value?
Entrepreneurship through acquisition (ETA) is a model in which an entrepreneur, usually backed by investors, searches for and acquires a small going concern with existing customers, employees, and profits, rather than starting a business from scratch. The usual goal of an ETA project or search fund expedition is to create equity value for investors and the entrepreneur, who will share in any equity gains when the business is sold, usually after an average of five years.
Conventional wisdom in ETA holds that value creation is primarily internal and operational: Buy a company with inefficiencies, improve EBITDA (earnings before interest, taxes, depreciation, and amortization) through revenue growth and margin expansion, then exit at a higher value because the business is fundamentally better and bigger. Alternatively, value can be created through EBITDA multiple expansion, where the exit buyer pays a higher price per dollar of earnings than the entry price; this form of value creation relies, at least in part, on external factors, like market fluctuations and buyer trends. Our research tests which of these mechanisms actually drives value in practice.
What did you find when you tracked firms that had been acquired by search funds and eventually sold?
Our analysis shows that enterprise value creation in ETA is driven predominantly by EBITDA multiple expansion rather than operational improvements, reflected by increased earnings and margins. Across our sample, enterprise value grew from approximately $1 billion to $4 billion, with roughly 80% of that increase attributable to EBITDA multiple expansion (a higher EBITDA valuation multiple at exit than at purchase) and only 20% to EBITDA growth (an increase in the firm’s earnings). In our study, EBITDA multiples rose from 6.3x at entry to 15.6x at exit, on average. This magnitude of multiple expansion is substantial and likely larger than many observers would expect.
Entrepreneurship through acquisition is less an operational, skill-centric story and more a strategy focused on acquiring, growing revenue, and ultimately selling businesses in a more favorable valuation environment.
While EBITDA increases over the holding period, the composition of that growth is revealing. Revenue grows significantly, but EBITDA margins decline from 25% at entry to 19% at exit, indicating that businesses become larger but not necessarily more efficient or profitable. In fact, revenue effects contribute positively to EBITDA growth (190%), while margin contraction offsets a meaningful portion of those gains (negative 90%). Common wisdom in ETA circles assumes that ETA CEOs are superior operators compared to inattentive sellers. In this context, superior means the ability to extract more EBITDA dollars from each dollar of revenue. Our data indicates that, in aggregate, this simply is not true. EBITDA margins consistently flag.
Taken together, the results suggest that the typical ETA outcome features strong revenue growth, declining margins, modest EBITDA lift, and extensive multiple expansion at exit. The dominant driver of value creation is not EBITDA growth, but the increase in valuation multiples.
How do these results change the thinking for CEOs and investors considering the ETA route?
In our analysis, all roads lead to the unequivocal conclusion—enterprise value creation is primarily driven by EBITDA multiple expansion across all scenarios. These findings fundamentally shift how CEOs and investors should think about ETA. First, they suggest that success depends heavily on achieving multiple expansion at exit, which introduces meaningful exposure to market conditions and buyer behavior. In effect, a significant portion of returns is driven by external factors rather than by CEO-driven operational improvements alone.
Second, the results reframe the role of margins. EBITDA margin contraction is common and should be expected. In some cases, this may reflect deliberate investment in growth or infrastructure, which can enhance the company’s attractiveness to buyers even if it depresses near-term profitability. In other words, declining margins are not necessarily a sign of poor performance; they can be a courageous bet by a CEO.
Finally, reliance on multiple expansion to generate returns highlights that ETA returns are heavily back-end loaded. Value is realized primarily at exit, making outcomes sensitive to terminal value. If multiple expansion (with its large dependence on external factors) becomes less reliable, operational improvements will need to play a larger role in sustaining returns.
Overall, our analysis suggests that ETA is less an operational, skill-centric story and more a strategy focused on acquiring, growing revenue, and ultimately selling businesses in a more favorable valuation environment.