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.
- 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.
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.
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.
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.
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.
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