Deal Size - Self-funded vs. Traditional

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November 12, 2020

by a searcher from INSEAD in Sydney NSW, Australia

I keep shifting between going down the self-funded and traditional search and there's one thing that bothers me - deal size. I want to buy a company, not buy a job, and I want a management team under me.

I know that commonly it is said that self-funded searchers tend to target / end up with smaller businesses, whilst traditional searches target larger companies ($30m rev, $3-5m EBITDA).

Assuming the self-funded searcher has built an investor network, received 'letters of available capital' in exchange for right of first refusal, and kept investors regularly updated/ engaged during the###-###-#### month search.

As such Isn't the only difference between a self-funded and traditional search where the search money comes from (savings vs. investors), which would mean that both can technically target the same deal sizes with similar success? Or am I missing something?

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commentor profile
Reply by a searcher
from Harvard University in Midland, TX, USA
I would also say a big difference is how the debt portion of the capital stack is financed. SBA loan limit is currently $5M, making it an unlikely tool for a deal on a $5M EBITDA. Many investors look at the SBA Personal Guarantee from the Searcher as similar to equity and therefore the Searcher will retain more of the overall equity of the deal. My personal opinion is that the Traditional vs Self-Funded searches may seem similar, but the financing and incentives drive them to be materially different. (Caveat: if you are Self-Funded and find a big deal, you can certainly get it done, but your lenders and equity holders will likely be a separate group).
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Reply by a searcher
from Indiana University, Bloomington/Indianapolis in Dallas, TX, USA
I agree with comments above, which support OP's thesis. One difference is the commitments attached to investor capital - theoretically, good deals and good economics means you'll raise the equity, but investors will likely prioritize the searchers they back before new searchers or outside deals. There's only so much capital per fund per year and they need to keep the portfolio flexible.
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