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Enterprising deal makers are ditching the lucrative billion-dollar buyout in favour of buying much more manageable companies: Canadian small businesses.

These targets, often family-run, are in the spotlight because many of their baby boomer owners are nearing retirement. And many are thought to have untapped potential, but aren't publicly traded so they go unnoticed by buyers with enough capital to help them expand.

A growing number of current and former Bay Street financial types are making it their missions to identify and acquire these hidden gems. But instead of using the traditional private equity model, where one fund buys a number of different companies and passively manages each by taking seats on their boards, a few hybrid methods are being employed.

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Investment manager Connor, Clark & Lunn and Michael Lee-Chin, the former head of AIC Ltd., are now in the business of buying small businesses and offering stakes in them to their high net-worth clients. Search funds have also emerged, and these investment vehicles simply strike one deal each and then their managers take over as the chief executive officers of their targets.

For both types of buyers, their ideal target companies typically generate $2-million to $10-million in earnings before interest, taxes, depreciation and amortization, and the acquisitions are often in easy-to-understand industries, such as security or outsourced financial services.

At the moment, search funds are generating the most buzz, prompting more people to try their luck with this model. These vehicles first caused a stir in 2010 after Auxo Management launched and then struck a deal to buy UCIT Online Security, which provides 24-hour live video monitoring.

But even though new funds are popping up, creating more competition, the industry is remarkably friendly. Unlike the investment banks, which fight tooth and nail to beat each other for advisory mandates on big mergers and acquisitions, search funds are collaborative, helping each other find deals and sharing tips on where to raise funds.

"We don't really look at each other as competitors because we're all only looking for one transaction," said Josh LeBrun, a co-founder of search fund High Park Capital Partners, which he launched with his partner Adrian Bartha in the fall of 2011.

When they started out, they approached Auxo for advice and got all the help they needed. That paid off this fall when High Park signed a deal to acquire Calgary-based eCompliance, a provider of web-based occupational safety products whose clients include Home Depot Inc. and oil sands giant Canadian Natural Resources Ltd..

The High Park team has since paid the help forward, sharing tips with Mont Vista Partners, another search fund; RedLeaf Management Partners, which launched in July; and most recently, Gestalt Equity Partners, started by two former managing directors from Bank of Montreal's mid-market M&A group.

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But with so many people looking to buy the same types of companies, are there really enough quality deals? Adam Jezewski of Banyan Capital partners, CC&L's private equity arm, said there are plenty of businesses that have good management teams in place and decent financial reports, but the dilemma is that so many of these companies are already targeted by the big banks who want to run their sale auctions, which drives up acquisition prices.

"There are many others who don't know they're for sale yet … or are not quite ready [to be sold] by perfect auction definition," Mr. Jezewski said. These are the ideal businesses to find.

Mr. LeBrun feels the same way. He and his partner found their acquisition the old-fashioned way: cold-calling. Then they spent months working with the previous owners to build a relationship. "It's a process," he said. "They weren't necessarily looking to sell or to have investors."

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