Self-funded searches: when they make sense
The case for searching without a traditional fund, and the operating tradeoffs that come with it
The traditional search fund model assumes a searcher raises $400K to $700K in pre-acquisition capital from 15 to 25 investors who fund the search costs and earn the right to invest in the eventual acquisition. The model has worked for 40 years and remains the dominant path for searchers coming out of HBS, Stanford, and similar programs.
A growing share of searchers operate differently. Self-funded searchers, sometimes called "solo searchers" or "self-funded acquisition entrepreneurs," skip the traditional fund and finance their own search costs out of savings or sweat equity. At close, they raise a smaller equity check from a single investor or small group, layered on top of an SBA 7(a) loan that finances 60 to 80 percent of the purchase price. The result is full operating control, dramatically more equity ownership, and a fundamentally different risk profile.
When self-funded searches make sense:
- You have 12 to 24 months of personal runway and the temperament to spend it on a search with no income. - Your target deal size is sub-$15M enterprise value, where SBA financing is a viable structure (the SBA 7(a) cap is $5M of debt, which works well for deals up to about $12M to $15M depending on cash flow). - You want maximum equity ownership of the eventual business and are willing to give up the diligence and operating support a traditional fund provides. - You have direct industry experience that lets you compress the search by knowing exactly what you are looking for.
When the traditional fund makes sense:
- You are coming out of an MBA program with no prior operating experience, and the investor relationships compound over the deal lifecycle. - You want to acquire a larger business ($15M to $50M EV) where SBA debt does not stretch and you need committed equity at close. - You value the credibility a fund-backed letter of intent carries with brokers and sellers. - You want operating partners who have done this before to be on speed-dial in the first 12 months.
The economic comparison favors self-funded if and only if the search succeeds. Self-funded searchers typically end up with 70 to 95 percent of the equity post-close. Traditional searchers end up with 20 to 30 percent after the step-up and time-vesting carry to investors. The catch is that 25 percent of a successful business is worth far more than 100 percent of a failed search, and the traditional model dramatically de-risks the search itself.
If you can credibly carry a 24-month search on your own resources and have prior experience that lets you operate without a safety net, self-funded gives you better economics. If either of those is in doubt, the traditional fund's combination of pre-acquisition capital and operating support is structurally worth the equity dilution.