Self-funded Search Investing Report: Self-funded search vs. Traditional search funds vs. Independent sponsors

The process in which future owners pursue entrepreneurship through acquisition (ETA) looks different for everyone. As an investor, it’s important to understand each unique fundraising and ownership structure of the three most common ETA paths so you can diligence investment opportunities confidently.

While traditional search funds first rose to prominence in the 1980s as a way for searchers to raise capital and acquire a company, self-funded searches and independent sponsor deals have become increasingly popular over the year.

Let’s take a look at the key differences between these three approaches, highlighting their unique structures, funding strategies, and potential outcomes.

Traditional search funds

Traditional search funds are structured investments where an individual or partnership raises funds to search for and acquire a company they plan to operate post-acquisition. Here’s an overview of the model:

• Equity raise: Searchers may raise $400k–$500k to fund a 12-to-24-month search period. Additional acquisition financing often exceeds $1 million.

• Salary during search: Searchers typically receive $100k–$200k during this phase.

• Typical deal size: Companies with EBITDA ranging from $1–$5 million are common targets.

• Debt leverage: Debt accounts for 30%–50% of the total capital.

• Deal multiples: Multiples of 4x–8x EBITDA are standard.

• Post-close salary: Operators can expect salaries starting at $150k.

Self-funded search

Self-funded searches offer an attractive alternative for entrepreneurs seeking greater equity retention and flexibility. These searches only raise capital after the target company is under LOI, but provide significant upside for the searcher.

• Description: Individuals or partnerships search for a business and negotiate a Letter of Intent (LOI) before seeking funding for the transaction.

• Equity raise: A transaction may require $500k–$3 million or more to close.

• Salary during search: Self-funded searchers typically forego salaries during the search phase.

• Typical deal size: EBITDA for targeted companies typically falls between $500k–$2 million.

• Debt leverage: Debt constitutes 50%–90% of the total capital, enabling higher leverage.

• Deal multiples: Transactions are generally priced at 3x–5x EBITDA.

• Post-close salary: After closing, salaries often start at $150k or more.

Independent sponsors

Independent Sponsors are professionals experienced in deal-making who focus on sourcing buyout opportunities. Unlike other models, they typically do not operate the business post-acquisition.

• Description: Individuals or partnerships identify acquisition opportunities, often raising $3–$10 million or more to close transactions.

• Equity raise: Funds are raised specifically for the acquisition after a deal is identified.

• Salary during search: No salary is provided during the search phase.

• Typical deal size: Targets typically generate EBITDA of $2–$5 million.

• Debt leverage: Leverage typically ranges from 20%–50% of the total capital.

• Deal multiples: Valuations are comparable to traditional search funds, ranging from 4x–8x EBITDA.

• Post-close compensation: Independent sponsors receive management fees ranging from 5%–10% of EBITDA.

Key takeaways

Entrepreneurship through acquisition (ETA) offers diverse paths for aspiring business owners and investors, each with unique structures and potential outcomes. Traditional search funds provide a structured approach with upfront equity raises and moderate leverage, appealing to those seeking operational roles post-acquisition. Self-funded searches emphasize flexibility and higher equity retention but require greater personal risk during the search phase. Independent sponsors focus on sourcing and financing buyouts without taking on operational responsibilities, offering an alternative for seasoned professionals in deal-making. By understanding the nuances of each model, investors and entrepreneurs can align their strategies with their goals, ensuring a well-informed approach to acquisition opportunities.

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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.