SMB Newcomers Part 3 - Self-Funded vs Traditional Search

For new #smb #eta searchers, one of the first and most important decisions that needs to be made has to do with search method, namely "self-funded", "traditional", or some other search method. Let's dive into this topic for part 3 of my intro to SMB #acquisitions:

1) Some quick history: Most publications credit Irv Grousbeck with the creation of the search fund model. Search Funds get their name from the initial entrepreneurs who “searched” for companies to acquire and operate.

2) Self-funded search definition: Self-funded searches typically pursue buyouts of smaller firms using government-backed SBA loans. They often put in their own savings to fund the search, diligence, and down payment. They retain control over a majority of the acquired company.

3) Traditional search definition: Traditional searchers finance acquisitions with investor capital, often sourced prior to the identification of the investment target. Traditional searchers frequently receive a salary from their investors so they are able to search full-time.

4) Control and Risk versus Size and Stability: the SF model leads to higher leverage (+personal guarantee) on a smaller co, but more control over the search and operating process. Traditional searchers own a smaller % of a larger co and no PG but must adhere to investor needs.

5) Long-term outcomes: Self-funded searchers, with larger ownership stakes, can hold for longer periods of time while traditional searchers must align with investors that could have faster timetables for exit (can be 5-7 years).

Both of these methods are valid with their unique combinations of risk and upside. Make sure to have plenty of conversations with both successful and failed searchers to figure out which method works best for your goals and investing style!