Differences between a traditional search fund and a self-funded search

If you're an entrepreneur looking to acquire a small business, you may have come across the term "search fund." You may have seen it mentioned in an entrepreneurship through acquisition (ETA) course or even come across the online forum called Searchfunder.

The technical definition of a search fund is a specialized investment vehicle that provides capital to an entrepreneur to search for, acquire and operate a single small business. By way of comparison, it’s as if a private equity group raised a single fund just to find, buy and operate one business.

Historically, a search fund would involve raising capital from investors to fund both the search process and the acquisition. This is what’s referred to as a “traditional search fund.” 

More recently, entrepreneurs have been conducting self-funded searches. Instead of raising capital from investors to fund the search phase of the process, they fund the search (and their living expenses) out of their own savings and only raise capital once a deal is ready to be done. In exchange for fronting the costs, self-funded searchers have more flexibility and get better economics in the deals.

Traditional search funds

The origin of search funds can be found on Stanford’s campus. H. Irving Grousbeck came up with the concept in the mid 80s to encourage more entrepreneurship in the MBA program. Since then, it has become increasingly popular.

One of the main advantages of a traditional search fund is access to a larger pool of capital. With institutional investors on board, the searcher has more money to work with and can target larger businesses. Additionally, the entrepreneur has access to experienced investors and advisors who can provide guidance and support throughout the acquisition process.

However, there are also some disadvantages to the traditional search fund model. Because there are multiple investors involved, the entrepreneur may have less control over the acquisition process. Investors will expect a greater return on their investment, as they have lent the searcher money for the search phase and the acquisition itself. 

Self-funded search

A self-funded search is a newer approach to setting up a search fund. In this model, the entrepreneur funds the search process themselves, either through personal savings or with the help of friends and family.

One of the main advantages of a self-funded search is greater control over the acquisition process. The entrepreneur can take their time searching for the right business, without the pressure to generate profits quickly. Additionally, because there are no investors involved initially, the entrepreneur can iterate on his or her thesis or industry target without worrying about investor buy-in.

However, there are also some disadvantages to the self-funded search model. There are no investors formally committed to funding the acquisition, meaning the searcher has to simultaneously network with investors while finding and vetting acquisition targets. Additionally, without the support of experienced investors and advisors, the entrepreneur may need to rely more heavily on their own expertise and resources.

A comparison of traditional search funds and a self-funded search

Below is a comparison of some of the dimensions of a traditional search fund vs a self-funded search. 

If you’re curious to dig into the financials, you can see a sample projection from Guesswork Investing’s newsletter below.

Final thoughts

Both traditional search funds and self-funded searches have their advantages and disadvantages. Ultimately, the right approach will depend on your personal preferences, access to capital and goals as an entrepreneur.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.