Self-funded vs. Traditional Search Funds: What’s the Difference?

If you are looking to acquire a business with the help of a search fund, you may be wondering whether to be self-funded or to go through the traditional search process. This short article will explain the differences and help you make the most informed decision. 

Traditional Searchers raise money from institutional investors or high net worth individuals to fund the entire search process. Self-funded searchers use their own money or go to friends and family to cover their expenses during the search process. 

When the search is ready to make an acquisition, the traditional searcher tends to make larger acquisitions but take a smaller equity stake in his/her business, the rest being owned by the investors. Self-funded searchers tend to do smaller acquisitions but take a majority equity stake in his/her business. Self-funded searchers expose themselves to significant financial liability, while the financial liability of the traditional searcher is limited. 

Due to this ownership difference, the dynamic between the operator and his/her investors is different as well. Individuals who utilize a traditional search fund play the role of CEO, with the investors playing the role of a board of directors who oversee the CEO’s performance. Individuals who are self-funded play the role of an owner, have final say in all important decisions, and must hold themselves accountable for their company’s performance.