Pros to Traditional vs Self funded (with job)
August 22, 2023
by a searcher from University of Maryland - Robert H. Smith School of Business in Washington, DC, USA
Many searchers will be looking for 2+ years for a company and a decent amount of them close their funds unable to find one. Search is also very emotionally taxing. Plus, if you fail to acquire, it becomes (more) difficult for them to find work afterwards / they have to go back to square one.
Why not continue working a job (being possibly paid more) and do a self-funded search (where you also have more flexibility in the acquisition ie one investor can fund it) to eliminate this risk? What are some reasons to pick the traditional search fund route instead of self funded?
Given that you spend two years just looking for a company, for a minority equity stake (if successful), I believe that building a 1M+ ARR service-based company in that timeframe for a much bigger equity stake is also doable without the risk.
from Yale University in Calgary, AB, Canada
Question #1: Am I dead set on ETA and would I be unsatisfied in a standard corporate role for the rest of my career? If yes, then you should be dedicating 100% of your time to finding the business that you want to acquire. If no, then you may need some more time to evaluate your career aspirations.
Question #2: Can I afford to not have a salary for###-###-#### months while I look for this business, do I have some sort of personal balance sheet / high certainty F&F capital / the requisite ability and experience to raise capital on a deal-by-deal basis to fund an acquisition? If yes, then you should do a self-funded search. If no, then you should do a traditional search.
Yes, there are other considerations like whether you value having the advisory board that some traditional search cap tables can bring to the table, or whether you plan to undertake an expensive search that requires that you fly all over the place and need G&A funding to cover those expenses, or whether you like the added legitimacy that some search fund sponsors bring to the table in your search effort. All of those are absolutely valid secondary benefits. But at the end of the day YOU are going to need to source the deal, YOU are going to make sure the due diligence is tight and YOU are the one that needs to make the hard decisions once you are the CEO of TargetCo. Your investors' support can be invaluable but they can only do so much.
from University of Birmingham in London, UK
Self-funding the search while working was the hardest and most stressful experience I've ever had in my life. If the deal hadn't closed I would have been personally on the hook for $200k+ in deal and financing fees, A traditional search gives you that security of a salary for searching, the benefit of playing with "house" money and free equity. The major con is you get a *much* smaller piece of the pie. Typically 8% of common equity initially with a cap of 25% for a single searcher. Meanwhile self funded allows you to set your own terms. For example I own 90%+ of the common equity in my business. Looking back now, was it worth it? Absolutely! But you should go in with the understanding it is a much more risky proposition.