Self funded search vs. independent sponsor: best structure?

February 07, 2025

by a searcher in Montreal, QC, Canada

I'm aiming to acquire a company between $2M - $5M in EBITDA and I'm considering various structures for the deal.

Would investors be more comfortable with the typical Independent Sponsor structure or a self funded structure where they invest their capital and get a step up on their investment l to determine how much equity they'd own?

I am self funded for my search (haven't raised any search capital), and I'm wondering if I can own equity upfront rather than getting carried interest at exit.

Is there a way to structure a deal in this size range that takes element from the independent sponsor model and the self funded deal structure?

For example, assuming I find a company and structure it like this:

$25M EV
$20M Debt / VTB (80%)
$5M Equity from LPs (20%)

Under the independent sponsor model, LPs would own all of it, and the sponsors would get compensated through the carried at exit.
Under the self funded model, LPs would own 20% x (Step-Up), where the steps would be ~2x-2.5x, which would mean that they would end up with 40%-50% of the equity, and the self funded searchers would get the rest.

A few questions:
- Is there a model that investors prefer?
- Does the self funded model work only because of the SBA? and does it work for larger deals?
- What's the best way to structure this for the searcher to get equity upfront?

Reply by a searcher
from Cornell University in Salt Lake City, UT, USA

Regarding investor preference. In my experience, those writing larger checks typically prefer independent sponsor deals. Many of them don’t fully understand or favor SMB investing. On the other hand, SMB investors tend to write smaller checks but often prefer the SMB model, even though they receive less equity—mainly because the acquirer is directly running the company and personally guaranteeing the loan. While some investors participate in both SMB and independent sponsor deals, they seem to be less common.

Reply by a searcher
from Dartmouth College in Boston, MA, USA

Step-up should only be part of the equation if you are taking search-phase capital. Otherwise, in practice sweat equity and carried interest should end up looking quite similar. The investors get their money back (plus preferred rate of return), then you split proceeds (either from an exit or from distributions) along the sweat equity or carried interest lines. Governance might be another important factor to consider, separate from economic returns.

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