Self-Funded vs Traditional Search Fund: What Is Right for You?

Self-Funded vs Traditional Search Fund: What Is Right for You?

Want to buy a million-dollar business?

How you set up an acquisition can mean the difference between life-changing money and personal bankruptcy.

Here's how to choose your path wisely...

Two Main Options

If you are looking to buy a business you can either go the self-funded or traditional search fund route.

They have very different outcomes in different scenarios.

Let's talk:

- Options

- Downside Case

- Middle Case

- Upside Case

- Long-Term Goals


Where you find and buy a business yourself.

Often (but not always) with a personally guaranteed SBA 7a loan and few/no investors.

- High-risk, high-reward

- Higher leverage (90+%)

- You pay deal & search fees

- Searcher takes all/most equity

- No gatekeepers

Traditional Search Fund

Where you partner with investors to find & buy a business

- Medium-risk, medium-reward

- Bigger business at higher multiple

- Salary for the search period

- Deal fees paid by investors

- Searcher gets <30% of equity

- Often top MBA grads

- Standard terms

Failure to Find a Business:

The reality is this happens to many searchers.

Self-funded: you could be on the hook for broken deal fees and costs. No salary taken during the search period.

Traditional: Get paid a decent salary (~$120k) and investors pay for any broken deal fees.

Downside Case:

Business goes bust, what happens?

Self-funded: Bad. Often you have personally guaranteed a large loan and need to pay it back (~2% failure rate). This can financially ruin you on the downside.

Traditional: You lose your sweat equity and the board can fire you.

Middle Case:

Business continues but is flat or low growth.

Self-funded: Great. As long as you can continue to pay down the debt your equity is growing substantially in value.

Traditional: Not great. Investors will take most of the economics (and do fine) if you can't grow.

Upside Case:

Self-funded: Great. You own most or all of the equity so an increase in cash flow or equity value all goes to you.

Traditional: Big money. You own significant equity in a larger business than a self-funded deal. This is where life-changing money is often made.

Long-Term Goal:

Do you want to live the small business owner lifestyle? Self-funded is probably a better fit for you. Enjoy the cash flow.

Do you want to be an executive and larger capital allocator long-term? Then traditional is probably the right path for you.

Other Options:

Self-funded without personal guarantee - start small or hard to pull off

Independent Sponsor - No plan to be CEO

Traditional PE - Raise pool of capital to buy, improve, sell multiple businesses. Need track record.

HoldCo - Buy & hold multiple. Start with one.

TLDR on search paths:

- Self-funded has no gatekeepers

- Traditional for swing for the fences

- Personal guarantees have real risk

- Depends on your long-term goals