Self Fund Search versus Traditional Search

October 26, 2023

by a searcher from University of Illinois in Chicago, IL, USA

Any advice on deciding what's the best option between a self fund search versus traditional search? Technically, I have savings and can fund my search however not sure if I should liquidate my savings or pursue the traditional route.

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Reply by a searcher
in Tucson, AZ, USA

In a search fund model, generally speaking, the searcher has a guaranteed salary for up to 2 years during the search and can focus 100% on the search. If you are willing to move anywhere in the US, this could prove to be a successful search model for you. If you successfully acquire a business, you’ll get 8 ⅓% equity at close, another 8 1/3 % after a specific time period (~4 years) and if certain goals are met, and finally the last 8 ⅓% when the business exits after meeting certain IRR guidelines. At any time during the process, your investors/board can fire you and you are beholden to their input. Your board will be composed of business-savvy people who are there to provide support and share aligned incentives in the success of your business. They may not agree with each other and may give diametrically opposed advice at times. Your equity is lower but you will also be able to purchase a business that is (likely) significantly larger than you could otherwise acquire through self funded search. If your current employment is very taxing and doesn’t allow you to take phone calls, review CIM’s, etc., a search fund will allow you to quit your primary job and focus on search full time.

If you are self funded (and you take advantage of the SBA program), you will need to come up with a minimum of 5-10% of the purchase price of the business, meet minimum credit requirements, sign a personal guarantee on your home and are capped at a 5M purchase price. It’s possible to get funding outside of the SBA program as a self funded searcher but it has a lot more hurdles to overcome. You may find it challenging to work at your current job and search for a business to buy, but if you can manage it, it pays off in so many ways. You will maintain an income while searching but not be beholden to investors. If you have to quit your job to dedicate yourself to search, you will bleed your savings and may lose a lot of purchasing power when you do find a business to buy. When you buy the business, you will own 100% of the business and you are only responsible to yourself. You can choose your mentors as you see fit and you won’t need their money.

As others have mentioned, reach out to anyone here who may be able to assist you in the process. Most are willing to chat with you and help any way they can. Best of luck in your journey!

Reply by a searcher
in Miami, FL, USA

Absolutely ^redacted‌ thank you for tagging me, this is a great question and a critical decision point for anyone looking to acquire a business. (I’m stepping a little into my company CFO’s space here, lol) A self-funded search can offer you more control and potentially a larger equity stake in the acquisition. Since you are using your own capital, you don’t have to worry about outside investors influencing your decision-making process. However, it’s important to consider the risks associated with liquidating your savings. This move can put a significant strain on your personal finances, and it’s crucial to have a solid plan in place to mitigate these risks. On the other hand, a traditional search fund involves raising capital from external investors to fund the search and acquisition process. This path can provide you with access to more resources, mentorship, and a larger network, which can be invaluable during your search. However, it also means giving up some control and a portion of the equity, as your investors will expect a return on their investment. At the end of the day, both paths have their pros and cons, and the best choice depends on your individual circumstances and preferences. Our advice would be to weigh your options carefully, consider the risks and benefits of each path, and choose the one that aligns best with your goals and risk tolerance. Hope this helps!

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