The Search Fund Crossroads: Self-Funded vs. Traditional Search Funds

The entrepreneurial journey to becoming a CEO through acquisition presents a critical fork in the road: traditional search fund or self-funded search? While both paths lead to the same destination (owning and operating a small to mid-sized business) the economics, risk profiles, and ownership structures differ dramatically.

## The Traditional Search Fund: Lower Risk, Lower Reward

The traditional search fund model operates like a well-oiled machine. You'll raise approximately $400K-$500K in North America (€300K-€700K in Europe) from 10-15 investors who effectively become your sponsors. This capital provides you with a modest salary (typically $50K-$80K depending on geography) and covers your search expenses for up to 24 months.

The beauty of this arrangement? Your financial risk during the search phase is minimal. However, this security comes at a price: you'll likely end up with 25-30% of the equity in your acquired company, assuming you hit performance vesting thresholds. Your investors receive the remainder, plus a preferred return (typically around 8%) on their invested capital. Traditional funds also include a "1.5× step-up," meaning early investors' search capital converts into acquisition equity at 150% of face value. In return, you are getting a roster of experienced investors, guidance and credibility when speaking to sellers / advisors.

## The Self-Funded Approach: Higher Risk, Higher Reward

Self-funded searchers, by contrast, operate without a safety net. You'll cover all search expenses from personal savings, receive no salary during the hunt, and when you find a target, you'll assemble capital on the fly—typically through a combination of bank loans (often with personal guarantee), seller financing, and a handful of investors brought in at the last minute.

The potential upside? Self-funded searchers frequently retain more equity in their acquired companies. There's no automatic step-up for investors and no preset vesting schedule—you typically own what you own from day one. The trade-off is clear: you shoulder significantly more personal financial risk and are on your own, but keep a larger slice of the pie (typically of a smaller company) if successful.

## Size Matters: Target Company Differences

Traditional searches typically target larger companies (often exceeding €1.5M in EBITDA) because they have deeper equity pools behind them. Self-funded searchers generally pursue smaller acquisitions (€500K-€1M EBITDA) that can be financed with personally guaranteed loans and minimal outside equity.

## The Freedom vs. Support Debate

The ETA community remains divided on which model is superior. Self-funded advocates champion the autonomy: you answer to no one during your search, can pivot strategies at will, and maintain control post-acquisition. Want to hold the business long-term rather than pursue a exit? That's entirely your call.

Traditional search supporters counter with the power of their platform and network. When you raise a fund, you gain the combined brainpower of seasoned investors who provide guidance, credibility with sellers, and eventually form an experienced board. As Rich Kelley of SFP noted, a "good searcher" in the traditional model is someone capable of working with 10-20 investor-advisors and synthesizing their perspectives.

## Which Path Is Right For You?

Your choice should hinge on several factors:

• Financial risk tolerance: Can you go without income for potentially two years while investing $50K-$100K of your own money? If not, traditional search provides a financial cushion.

• Control vs. support preferences: If maintaining maximum equity and decision-making authority is non-negotiable, self-funding gives you that freedom. If you value mentorship and guidance, traditional search delivers a built-in advisory network.

• Target company ambitions: Eyeing a business with €5M+ in revenue and 50+ employees? You'll likely need a traditional fund's capital. Comfortable with a smaller operation (€1M revenue, 5-10 employees)? Self-funding might be perfect.

• Personality and working style: Are you comfortable managing upward and synthesizing input from multiple stakeholders? Traditional search requires investor herding. Prefer independence? Self-funding might better suit your temperament.

The good news? Both models have produced excellent outcomes. Whether you raise a formal fund or go it alone, success ultimately comes from finding a great business at a fair price and executing well as its leader. The model you choose should be the one that lets you perform at your best.