By Newton Campos (Adjunct Professor, IE University) and Luis Eduardo Blanco (Search Fund Entrepreneur at Igarapava Capital)
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Every searcher knows the anxiety: Am I about to pay a sweet price for a sour “lemon” business? That fear has a name: Akerlof’s “market for lemons” (1970). The core issue is asymmetric information: the seller of a company knows much more about the real reasons for selling and the soon-to-be-sold company than the searcher and his or her investors (buyers). And sellers might withhold information that could affect the proper assessment of the deal and its valuation. Left alone, real great companies get crowded out or underpriced, while bad companies are sold at a “market” price.
Search Funds live right inside that problem, which is why the fix isn’t magic: it’s market design. We bring hidden quality to light with signals, screening, credible intermediation and contingent contracts that should pay for what actually shows up after closing. In thinner-information economies like emerging ones, the broker’s reputation does even more heavy lifting, and post-sale roles help align incentives when know-how stays private.
1) The asymmetry of information problem in practice
- Good sellers still withhold context: Even solid companies come with unspoken drivers for selling: a future industry shift, a key account at risk, or a corrosive culture that hasn’t hit the numbers yet. And sometimes, the company is not so much a “lemon” as it is a fruit no one else will want later: a niche business with no obvious next buyer.
- Buyers can’t perfectly identify sour “lemons”: From the teaser and a first pass at financials, the searcher prices the outside view while the owner holds the inside story.
- Adverse selection follows: Owners of weaker businesses have the strongest incentive to sell quickly (and to dress things up), so searchers can spend outsized time on deals that look great on paper but turn out to be “lemons” in reality.
This is exactly Akerlof’s point: when sellers know more than buyers about true quality, low-quality deals crowd out good ones or pull prices of good quality companies down. In lower-middle-market M&A, opaque financials, idiosyncratic customers, and owner-operator know-how raise that risk, unless we use signals, screens, credible intermediation, and contingent contracts appropriately.
2) When academic literature actually helps
The academy may sound dry to some, but for geeky practitioners like us it gives precise names to M&A patterns we’d otherwise attribute to “gut feeling.” Here are research-backed tools that map directly to Search:
- Signaling (seller actions). Sellers can credibly signal quality, e.g., audited/reviewed statements, robust reps & warranties, partial seller financing, or agreeing to stay meaningfully involved post-close. Signals work when they’re costly to fake and correlated with true quality (Spence, 1973; Leland & Pyle, 1977).
- Screening (buyer actions). Buyers screen via diligence: quality of earnings (QoE), customer interviews (and, where appropriate, mystery-shop “ghost” customers), KPI stress tests, and tight contract terms. With imperfect information, conservative lenders often deny credit rather than just raise rates (Stiglitz & Weiss, 1981).
- Intermediation (brokers as certifiers). In markets with selection risk, expert middlemen improve outcomes by certifying quality and matching efficiently (Biglaiser, 1993). A reputable broker invests in screening, surfaces information sellers might not volunteer, and effectively reduces buyers’ diligence costs, especially where public information is thin (i.e. emerging economies).
- Contracting for uncertainty: a) Aligned-stakes financing (seller notes, rollover equity and consulting agreements): Keep sellers economically exposed, signaling confidence and aligning incentives through the transition. Use alongside, not instead of, your screening and eventually an earnout design. b) Contingent consideration (earnouts): When parties disagree about the future because of private info, earnouts can bridge the gap: part fixed price, part tied to post-close results. Typical horizons cluster around 2–3 years with accounting-based triggers (Cain, Denis & Denis, 2011). Caution: earnouts work but can also distort behavior and spark disputes if drafted loosely (Mohapatra, Wyma & Wasserstein, 2025).
3) Institutions matter: emerging versus advanced economies
When contract enforcement, disclosure norms, and credit registries are weaker, information frictions bite harder. The institutions literature (Acemoglu & Robinson, 2012) is clear: the weaker the “rules of the game,” the greater the adverse selection and moral hazard in SME M&A, so the payoff to credible brokers and tight contracting rises accordingly.
Example: In Brazil, brokered deals are often perceived as more common or effective because skilled brokers can compress timelines and surface hard-to-find information, sometimes saving months, if not years, in a typical SME sale process. That pattern matches theory: intermediation helps most when public information is limited (Biglaiser, 1993). In Brazil, more than 90% of all traditional Search Fund closed deals involved an exclusive broker (author’s data).
4) Buy to Sell: The Missing Lens
Even when a business passes every diligence screen, i.e. stable cash flows, low customer concentration and strong broker reputation, there’s one critical question many searchers forget to ask: Who will buy this company after me?
Buying a great business is not enough. A great business that can’t be sold later because of its niche market, limited scalability, or complex ownership structure can trap a searcher in a value dead end.
Experienced acquirers think in reverse. They begin with a plausible exit story, e.g., “If I double EBITDA and expand regionally, a PE fund or strategic will pay 6–8x” and work backward from there. That logic filters out seemingly attractive businesses with no clear path to liquidity.
This lens becomes even more crucial in emerging economies or lower-midmarket segments, where exit channels are thinner. In those environments, growth potential is not just a nice-to-have, it’s the exit strategy itself, even if searchers have long term investors like Family Offices or Evergreen funds. Traking businesses valuations and having clear and valid exit options add value for all stakeholders.
5) Conclusion: a practical playbook for searchers and investors
- Screen smart (before you fall in love). Ask for seller signals: audited financials, seller notes and a defined post-close role. Ask questions that cut information risk: What would make you not sell the company in the next 12 months? (motive truth serum). Which customer could you lose tomorrow and why? (concentration + churn risk). Which processes live only in your head? (keyperson/tacit knowledge). If I gave you +10% CapEx this year, where would you spend it? (deferred maintenance). (Wasserstein, 2023).
- Use the broker as an information amplifier. Favor exclusive, relationship-driven brokers with reputational skin in the game. Probe their vetting funnel, reference past mandates, and ask about false-positive/false-negative lessons. In thin-information economies, a credible broker’s certification carries real value.
- Contract for what you can’t underwrite: a) Aligned-stakes tools: pair with seller notes, rollover equity, and/or consulting agreements to preserve tacit knowledge and align post-close effort. Integration is where information finally becomes visible inside the firm and where value is usually confirmed or lost (Wasserstein, 2024). b) Earnouts (contingent consideration): pick metrics very tied to value creation (revenue/gross profit for demand uncertainty; EBITDA for cost pass-through environments), keep definitions tight (add-backs, timing, audit rights), and cap dispute surfaces.
- Anchor with evidence. Strengthen your proposal with one or two mini-cases or stats that illustrate the mechanism you’re leaning on (e.g., timeline compression with a reputable broker; an earnout that resolved a valuation gap before).
Bottom line: Great businesses are for sale, but as a searcher or an investor you must make the good ones visible and contract for the rest. In low-signal environments, the right broker and the right contract aren’t nice-to-haves; they’re the market’s workaround for information gaps.
References (open-access or canonical sources):
Acemoglu, D., & Robinson, J. (2012). Why Nations Fail. (book/excerpt) ia800606.us.archive.org
Akerlof, G. A. (1970). “The Market for ‘Lemons’.” QJE, 84(3), 488–500. (PDF) personal.utdallas.edu
Bargeron, L., Schlingemann, F., Stulz, R., & Zutter, C. (2008). “Why Do Private Acquirers Pay So Little Compared to Public Acquirers?” JFE, 89(3), 375–390. (PDF/NBER) bpb-us-w2.wpmucdn.com+1
Biglaiser, G. (1993). “Middlemen as Experts.” RAND Journal of Economics, 24(2), 212–223. (JSTOR/EconPapers) JSTOR+1
Cain, M. D., Denis, D. J., & Denis, D. K. (2011). “Earnouts: A Study of Financial Contracting in Acquisition Agreements.” JFE, 101(1), 162–184. (Elsevier page) ScienceDirect
Leland, H., & Pyle, D. (1977). “Informational Asymmetries, Financial Structure, and Financial Intermediation.” JF, 32(2), 371–387. (JSTOR) JSTOR
Spence, M. (1973). “Job Market Signaling.” QJE, 87(3), 355–374. (PDF) Competition and Appropriation+1
Mohapatra, R., Wyma, N., & Wasserstein, A. J. (2025). Exploring Earnouts and Their Use in Search Fund Acquisitions. Yale School of Management case note. som.yale.edu
Stanford GSB: Search Fund Primer. 2024/2022 Studies & Primer. gsb.stanford.edu+2ONEtoONE Asset Management+2
Stiglitz, J., & Weiss, A. (1981). “Credit Rationing in Markets with Imperfect Information.” AER, 71(3), 393–410.
Wasserstein, A. J. (2021). On the Nature of Programmatic Acquisition Strategies: Why Things Go Awry. Yale School of Management note. som.yale.edu
Wasserstein, A. J. (2023). Questions Aspiring Search Fund Entrepreneurs and Potential Investors Might Ask Each Other. Yale School of Management case note. som.yale.edu
Wasserstein, A. J. (2023). Eight Questions Aspiring Search Fund Entrepreneurs Should Consider Before Launching Their Project. Yale School of Management case note. som.yale.edu
Wasserstein, A. J. (2024). What Exactly Search Fund Investors Do—and Don’t Do—for Entrepreneurs. Yale School of Management note. som.yale.edu
Wasserstein, A. J. (2024). Exploring an Integration Framework in a Programmatic Acquisition Strategy. Yale School of Management note. som.yale.edu
