Funded or Unfunded Private Equity Search, Which is Best?

Private Equity Search Fund

Let’s say you’ve caught the entrepreneurial bug and are ready to go all-in. What’s the next step? You could build a business from scratch, of course, if you have a good idea and the motivation for that type of work. Or, you could look for an existing business to buy and run. More and more people are choosing the latter as a career path, and you don’t necessarily need an MBA to do it. In this post and the next, I’ll cover some of the basics of what it requires.

In the private equity world, looking for a business to buy is called a “search” (or sourcing a deal – links to lessons that cover sourcing strategy are available at the bottom of this post), and there are two ways to do it.

The first is via a funded search. This involves getting investors to put their money and trust behind you right from Day 1. In some cases, they might only provide a pool of capital to cover the costs of the upfront search, while retaining a right of first refusal once an acquisition target is found. In others, investors might commit a defined pool of investment capital to finance an actual deal from the start as well. Either way, your assignment is to source, acquire, and help run the chosen business profitably, before eventually selling it so that everyone involved can (hopefully) make a return.

Related Video: Average Equity Earned by a Search Fund CEO: $7.57 Million

The second type of search is an unfunded search, also known in some cases as an independent sponsor. An unfunded search is for those who like to go it alone. You have more control at each step of the process, but you must also finance the search and acquisition with your own resources and borrowing capacity. That’s a serious caveat, since the costs of searching for and diligencing a business to buy can often run well into the six figures. The only way to decide which approach is best for you is by doing a detailed analysis of the pros and cons of each method and how they apply to your individual situation.

The Pros of a Funded Search

  • Ideally, the investors will be paying you a salary for performing the search, so even if it fails to result in an acquired business, you may not have to deal with the consequences of several years of lost earnings. According to a 2022 Stanford Graduate School of Business study (video: YT | IG), the median annual salary for searchers was $120,000 (this increases to $250,000 to $270,000 for entrepreneurs that assume the CEO role post close).

  • The investors’ money will cover the (not insignificant) costs of the search, everything from travel and expenses (T&E) to fees for accountants and attorneys. A typical cost for a search (including the searcher’s salary) is $425,000 (MBAs Are Spurning Google to Buy Small Companies – Bloomberg).
  • Having investors means you can pursue larger targets. In fact, investors may require you to focus on businesses with, say, more than $1 million in EBITDA, in order to make the potential absolute dollar returns meaningful to them.
  • Closing a deal is much more likely with investor money involved, since at least in some funded searches, investors have already committed equity capital for the eventual business purchase, which significantly increases the searcher’s “certainty of close” in the eyes of sellers. Business owners may be less receptive to you if they know you the funds required to close have not already been raised.
  • Investors also bring non-monetary resources to the table, such as experience, advice, and potentially even a network of contacts that can add value to the search process.

The Cons of a Funded Search

  • Having investors means giving up some amount of control over the search. They may restrict you to a certain industry, geography, or size of business, while imposing a timeline (often two years) within which a business must be acquired.
  • When you find a target you like, an SBA loan is probably not going to be a financing option, though the investors may be able to help with other forms of conventional (or unconventional) financing. (Learn more about SBA loans here and here.)
  • If the investors don’t like the eventual target or deal you come up with, they may decline to participate in it.
  • You end up owning a smaller share of the acquired business, often 25-35%. Though you may still be the CEO, since you aren’t the majority owner, the investors typically also have the power to remove you if things don’t progress to their liking.
  • At some point, all investors want their money back, so there will probably be a timeline (often five years) within which you will be expected to sell or recapitalize the acquired business.

The Pros of an Unfunded Search

  • In an unfunded search, you will have more control and flexibility to go after exactly the kind of business you want, on your own timeline.
  • You will probably end up owning a majority share of the acquired business or possibly all of it if you don’t accept any outside equity capital. This has big financial implications. If you want to delve into the mathematics involved, check out this hypothetical case at Big Deal Small Business and this post on Independent Sponsor Economics (template available for download).
  • As a majority or sole owner, you will have much more control over decision-making at the acquired company, and you will not be fire-able (structure company control as a minority investor).
  • SBA loans may be a good financing option, although other conventional loans may be more challenging without backing from investors.
  • Without investors breathing down your neck, you can hold the acquired business for however long you wish. In fact, some unfunded searchers specifically look for businesses to own and operate for decades.

The Cons of an Unfunded Search

  • Closing the deal can be tricky. Unless your personal pockets are very deep, you will often be arranging a combination of debt and equity to make the acquisition happen after signing a Letter of Intent (LOI).
  • If you self-finance a search and then finance the purchase with a loan (such as an SBA loan) that requires a personal guarantee, your downside risk could easily reach into seven figures, between the cost of the search and the loan guarantee, not to mention the opportunity cost of the salary you likely would’ve been earning otherwise. And, at the end of the day, many people, especially early in their careers, simply don’t have the cash on hand to forfeit a salary and spend six figures to *maybe* acquire a business.

What About a Hybrid?

For those having a hard time deciding which type of search is right, there’s no ironclad barrier between the two. Some people, for instance, fund a search themselves but take on investors for the acquisition. As with any deal involving investors, things like percentage ownership and an exit timeline come down to negotiation and also to the nature of the investors brought on board. If it is only one or two people, decision-making might be easier, but might also require more compromise by the searcher. In a more diverse investor base, consensus may be difficult to build, but the searcher might actually end up with more “pull” if each investor’s share (and power) are more diluted.

A Private Equity Search is an Epic Quest

In the end, the best type of search is a matter of individual circumstances. Younger, less experienced people without significant personal savings may be drawn to the funded approach. But it’s not easy to get investors to commit capital. They tend to prefer credentials such as an MBA from a top school and/or past experience at a well-known bank, investment fund, or management consultancy.

Unfunded searchers can technically come from any background, as long as they can bootstrap the necessary resources. But that’s no cakewalk, either. A friend of mine in the field even went so far as to say, “I honestly would not recommend self-funding unless you are independently wealthy or have a spouse or partner who can easily support both of you for at least a couple of years.” I would add that there are always exceptions. There are, after all, all kinds of searches, including those done on a modest budget for relatively modestly priced businesses (see the video below for a wild example). But the financial demands of any unfunded search should be carefully considered before jumping in.

However you approach it, think of your private equity search as a quest in which a hero (you) undertakes an epic journey toward a goal. Such journeys form the basis of many of the most exciting stories written or filmed. Here’s hoping your private equity search turns out to be one of them. But before going any further, stay tuned for the next post, in which I will go into more detail about what daily life looks like for a searcher, funded or not.

More Free ASM Resources:

  1. Interview: Getting Started as an Independent Sponsor

From the ASM Private Equity Training Curriculum (Course):

  1. Private Equity Sourcing Funnel (Lesson)
  2. Private Equity Sourcing Strategy (Lesson)
  3. Attractive Private Equity Investments (Lesson)

Learn more about private equity transactions with ASM’s Private Equity Training course. The Private Equity Training course at was developed by industry professionals. The content below goes beyond the LBO model to explain how private equity professionals source, structure and close transactions.