Ask what percentage of a search-fund deal the searcher actually ends up owning, and no Canadian source will give you a number. What is real, and sourceable, is the two-phase mechanism the equity moves through.
Key takeaways
A search fund’s defining economic question — how much equity the searcher ends up with once a target is acquired — is negotiated privately between the searcher and their investor group on every single deal, and no Canadian body publishes, regulates or standardizes an answer. That is not an oversight in the sourcing for this article; it is the honest state of the market, and the same standing rule that applies to fund carry and hurdle rates elsewhere in this hub applies here: describe the mechanism, and do not attach a percentage to it that nobody has actually published.
A search fund runs through two structurally distinct phases. In the search phase, the searcher is not yet running a business — they are looking for one to buy, typically full time, for a period commonly measured in months rather than weeks. That phase needs funding for the searcher’s own living costs and search expenses (travel, advisory fees, incorporation costs for the search entity itself), independent of any specific target. In the acquisition phase, once a target is identified, negotiated and under a letter of intent, an entirely separate and much larger pool of capital is needed to actually fund the purchase price — a different scale of money, usually from a different, though often overlapping, group of investors.
Search-phase funding is typically structured as capital that investors put at risk before knowing what, if anything, it will buy — the searcher may find nothing investable within the search period at all. The mechanism commonly used is a note that converts into, or is repaid out of, the eventual acquisition financing if a deal closes, with investors who funded the search generally getting priority access to invest in whatever acquisition results. What converts, and on what terms, is negotiated per search, not published anywhere as a standard.
A common structural feature is a step-up: the searcher’s initial equity stake in the acquired business is smaller than what they can earn over time, with additional equity vesting against performance milestones after closing rather than all being granted at acquisition. The purpose is to align the searcher’s incentive with the business’s actual performance post-close rather than rewarding the search itself — but, again, no Canadian source publishes what the starting stake or the step-up thresholds typically look like, and stating a number here would be inventing one.
Whether the searcher’s equity is treated as ordinary income (compensation for services) or as a capital acquisition at fair value depends on the specific mechanics of how and when it is issued — a structuring question worked through with tax counsel on the specific deal, not a general rule that applies the same way to every search fund. This is exactly the kind of fact-specific characterization that should not be generalized from a template article.
Once a target is found, the acquisition financing question is the same one any other Canadian small-business buyer faces: the Canada Small Business Financing Program can finance eligible assets of a business with gross annual revenues of $10 million or less, at the lesser of purchase cost and appraised value, but it cannot finance a share purchase or an acquisition made by a holding company. A search fund structured to buy shares for continuity reasons, the way many operating-business acquisitions are, is making the same trade-off against CSBFP eligibility that any other buyer choosing between an asset and a share purchase makes.
A search fund is a real bet that can fail at the search stage itself — a defined search period can end with no acquisition made at all. What happens to the search-phase notes in that outcome is exactly the kind of term that has to be settled before the search begins, not negotiated after the fact: whether investors simply lose the search-phase capital outright, whether some portion is expected to be repaid from the searcher’s future earnings, or whether the search period can be extended on renegotiated terms. This is one of the clearest points of difference between a search fund and a committed private equity fund, where committed capital is deployed across a portfolio and a single failed search is not the entire outcome the way it can be here.
The two-phase search-fund structure and independent sponsor economics solve a related problem — getting paid for the work of finding a deal before any fund fee exists to pay for it — in different ways. An independent sponsor is generally already operating, often with some deal experience, and is paid through closing and monitoring fees plus a promote once a specific opportunity is brought to a capital provider. A searcher is typically earlier in their career, is paid a defined salary during the search itself rather than a per-deal fee, and the step-up equity plays a role closer to what a promote plays for the sponsor — aligned incentive on the eventual business’s performance, just reached through a different funding path to get there.
Once the acquisition closes, the vehicle holding the business — typically a corporation — needs a governance document setting out the searcher’s and investors’ respective rights, including how the step-up actually vests and what happens if the searcher is removed. A CBCA s. 146 unanimous shareholder agreement is the standard tool for this, giving investors the ability to constrain the searcher-turned-operator’s powers in ways the CBCA’s default director rules alone would not.
A searcher raises search-phase notes from a group of ten investors to cover eighteen months of salary and search expenses. Nine months in, a target is identified; the same investor group gets priority access to fund the acquisition, and the search-phase notes convert into a portion of that acquisition financing rather than being repaid in cash. At closing, the searcher receives an initial equity stake, with additional equity vesting over the following several years against performance milestones set out in the USA. None of the percentages in this example are published anywhere in Canada; the phases, the note-to-acquisition conversion, and the step-up structure are the parts that are real and commonly used.
No Canadian source publishes a standard figure — it is negotiated per search, between the searcher and their specific investor group, and varies with the terms each side agrees to.
Not automatically, but priority access for search-phase investors to fund the eventual acquisition is a commonly used structural feature, negotiated at the time the search-phase capital is raised.
Only for eligible assets of an existing business with gross annual revenues of $10 million or less, at the lesser of purchase cost and appraised value — it cannot finance a share purchase, which many search-fund acquisitions are structured around.
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