Independent sponsor vs self-funded search: Two paths to business ownership

For entrepreneurs pursuing business ownership through acquisition, two distinct paths have emerged: independent sponsorship and self-funded search. While both enable buyers to acquire established businesses, their approaches to operations, financing, and investor relationships differ significantly.

"Independent sponsors are basically deal-sourcers. They help finance a transaction and then serve in an advisory-like role versus a buyer running a self-funded search. The self-funded searchers are boots on the ground. They are going to be hands-on operators of these businesses," said Judd Goodrich, Head of Capital Markets at Mainshares.

This fundamental difference in operator involvement shapes everything from deal size to equity structure. Independent sponsors typically target larger businesses and maintain a more advisory role, while self-funded searchers buy smaller companies and step in as owner-operators. Understanding these distinctions has become increasingly important as more entrepreneurs explore acquisition entrepreneurship.

The operator's role

The level of day-to-day involvement marks perhaps the starkest contrast between these models. Self-funded searchers typically move to their business's location and take over as CEO, handling everything from daily operations to strategic decisions. This hands-on approach means they're often making hiring decisions, managing customer relationships and dealing with operational challenges directly.

"At a certain size, it's hard to go in and be the CEO of a $100 million company when you've never done it before," Goodrich said. "It's really hard to convince investors to invest in you, hard to convince banks to finance you, and it's also hard operationally to know what to do."

Independent sponsors, by contrast, usually serve in more strategic roles. They might join the board, provide guidance on major initiatives, or help with specific projects like market expansion. "They're likely a board member. They're maybe involved on a monthly quarterly basis," Goodrich said. "They're more like special project type of folks where they're like, 'Hey, we want to go figure out how to break into this market' or 'Hey, we have one location, we want to expand to two locations.'"

To the extent that independent sponsors join their acquisitions as CEOs, they’re typically less likely to have industry experience and more likely to have retained either the seller or senior managers to assist them post-close.

This operational difference extends to risk profiles. Self-funded searchers often personally guarantee their business loans, putting their personal assets on the line. Independent sponsors often try to avoid such guarantees, as they're not involved in daily operations and their compensation comes primarily through management fees and carried interest.

Deal economics and structure

The financial architecture of these models reflects their operational differences. Self-funded searchers typically target businesses with $500,000 to $3 million in EBITDA, using SBA loans to finance 75 to 90 percent of the acquisition. This financing approach, combined with their operational role, allows them to retain majority ownership of their businesses.

"Most independent sponsors, since they're not involved every day, don't want to be on the hook for their entire life," Goodrich said. "They start really making money if they can 3x, 4x, 5x investors' returns. If they get to a spot where that's not possible, they're likely going to start deviating their time and effort elsewhere."

Independent sponsors pursue larger deals, usually businesses with over $3 million in EBITDA. Their compensation typically mirrors private equity structures: management fees around 5 percent of EBITDA, plus 20 to 30 percent carried interest above a hurdle rate. Most independent sponsor deals include an 8 percent preferred return hurdle that must be cleared before the sponsor earns their carry. They might also earn acquisition fees of 2 to 5 percent of the deal size for sourcing and structuring transactions.

This difference in economics affects distribution strategies too. "For self-funded search, what we see is they are more lined up to pay back investors, provide distributions back to investors at a faster rate versus reinvesting all back into themselves and growing," Goodrich said.

Capital relationships

The investor base for each model varies significantly, reflecting their different deal sizes and operational approaches. Self-funded searchers typically raise money from a small network of high-net-worth individuals, friends, and family. These relationships tend to be more personal, given the smaller capital requirements and the investors' direct bet on the operator.

"Self-funded search investors receive distributions back at a faster rate versus reinvesting it all back into the business," Goodrich said. "It's kind of also a proxy of their novice, so they need to provide dividends and provide cash back to investors to kind of de-risk their investors."

Independent sponsors, meanwhile, work with institutional capital, including SBICs, private equity firms, and family offices. Mezzanine funds often co-invest alongside these institutions, creating more complex but flexible capital structures. These sophisticated investors expect institutionalized processes and higher returns. "The independent sponsors will ask, 'How do we see this go and have a chance to 3-4x?' They’re much more inclined to do that because they don't have everything to lose," Goodrich said.

Making the choice

For buyers considering either approach, the choice often hinges on their operational experience and capital access. Self-funded search suits entrepreneurs ready to run a business hands-on, while independent sponsorship better fits those with deal-sourcing expertise and institutional relationships.

"One of the toughest parts of finding deals is the fragmentation of brokers and deal networks," Goodrich said. "Above $10 million is where they need the experience of other operating partners or management that they don't have."

Both paths can lead to successful acquisitions, but they demand different skills and risk tolerance. Self-funded searchers must be prepared to personally guarantee loans and handle daily operations, while independent sponsors need strong deal-sourcing abilities and expertise in larger transactions.

The paths aren't mutually exclusive. Some self-funded searchers shift to an independent sponsor model when they find larger deals, while experienced independent sponsors might occasionally pursue smaller opportunities that align with their expertise. Success depends less on which path you choose and more on selecting the approach that matches your operational strengths, capital relationships, and long-term goals.

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.