Why 37% Of Search Funds Never Acquire -A Structural Tension in the Model

In a 2024 Stanford Business School Study of search funds in Canada and the United States from 1984, it was found that 37% of funds that concluded their search never made an acquisition. One structural tension that appears repeatedly in conversation around funded search is the interaction between leverage discipline and seller anchoring. As someone young in the ETA ecosystem and intentionally building underwriting reps, I find the tension between these factors quite instructive. Leverage discipline vs seller anchoring Leveraged acquirers often find themselves constrained when it comes to the EBITDA or SDE multiples that they can acquire targets for, mainly due the oncoming principal and debt payments they must incur (6.3 EBITDA multiple was median from Stanford Study). Under leverage, modest margin compression, customer concentration risk, or aggressive add-backs, the searcher’s ability to cover debt and achieve satisfactory equity returns can be materially impacted. Prompting an adequate margin of safety in most searches. This disciplined criteria is often at conflict with the price small-medium business owners are looking to sell their business for. The endowment effect often studied in behavioural economics, conveys that seller expectations shaped by identity and anchoring to peak earnings, may cause diversion from multiples supportable under a leveraged acquisition structure. Intermediaries in the sales process may additionally reinforce higher valuation expectations through competitive tension and commission based fee structures. The result is a structural mismatch, disciplined underwriting narrows the feasible pricing band, while behavioural and incentive dynamics may expand seller expectations beyond that point. As someone early in the ETA ecosystem and actively building underwriting reps, I’m especially interested in how practitioners navigate this tension in live deals. Would appreciate any perspectives from those who’ve been through it. Link to Sources Stanford Search Fund Study - https://www.gsb.stanford.edu/faculty-research/case-studies/2024-search-fund-study