Traditional vs Self-funded Search: Which is the right path for me?

The choice of whether to go down the traditional or self-funded search fund route is a commonly discussed topic. This decision depends on several key factors, each of which has its own set of considerations.

1. Your personal financial situation.
2. Your risk tolerance and control.
3. Your ideal target size and desired equity stake.
4. Your network and expertise.
5. Your time and effort commitments.
6. Seek expert advice.

Your personal financial situation

You should begin by evaluating your personal financial situation. This includes determining: (a) the extent of your own savings; (b) your cash requirements during the search period (to fund both the search itself and your personal living costs); and (c) your access to, and willingness to, take on personal debt.

If you have sufficient capital to sustain yourself during the search phase without relying on external investors, self-funding may be a viable option. However, if you prefer to mitigate personal financial risk and leverage investors’ resources, a traditional search fund may be more suitable.

Your risk tolerance and control

Your appetite for risk and desire for control over the search fund process and subsequent operations of the business should be considered.

Typically, self-funded searchers will have greater autonomy and authority, both during the search period and during ownership of the business. However, they will bear the full financial burden and risk during the search period. In contrast, traditional searchers benefit from financial backing and expertise of investors, but may lose some degree of control and autonomy in exchange.

Your ideal target size and desired equity stake

As a general rule of thumb, searchers going down the traditional route are able to acquire larger targets than self-funded searchers although they will hold smaller equity stakes. Typically, traditional searchers will retain a maximum of 25-35% of the ordinary shares, which usually vest in three equal tranches (one tranche on deal completion, one time-based tranche and one performance-based tranche).

Self-funded searchers, on the other hand, tend to target smaller acquisitions but are generally able to retain a greater proportion of equity than the traditional model (typically 40-60%, but we have seen as high as 70%).

Whilst it may seem appealing to own a bigger proportion of a smaller company, it’s possible that a smaller stake in a larger business can result in a larger financial reward (the classic question – is it better to have a small slice of a large cake or a large slice of a small cake?).

Your network and expertise

Next, consider the strength of your existing network and your industry expertise. In a self-funded search, these elements become especially important, as you’ll need to rely heavily on your own connections and credibility to attract investment and uncover acquisition opportunities. In contrast, traditional search funds typically benefit from access to a broader pool of established investors, making individual networks and prior industry knowledge somewhat less critical at the outset.

You may think that industry experience is an important factor in getting investor support – however we have seen searchers with a wide range of backgrounds acquiring in industries that they have never worked in before. It’s important to show that the skills and experiences that you have built are transferable and applicable to a wide range of industries.

Your time and effort commitments

When evaluating your approach to a search, it’s important to consider the time and effort you are prepared to invest.

Traditional searchers are typically expected to demonstrate consistent progress and accountability to their investors, which can create pressure to maintain momentum and regularly report updates. While they may have access to guidance from investors and advisors, they remain ultimately responsible for sourcing deals, conducting due diligence, and negotiating acquisitions.

On the other hand, self-funded searchers have greater flexibility in managing their time, as they are not bound by external reporting requirements. This autonomy can allow for a more adaptable pace, though it often comes with the challenge of managing all aspects of the search independently.

Seek expert advice

We recommend consulting with experienced entrepreneurs, investors and advisers, who have first-hand knowledge of both traditional and self-funded search funds. Their insights can provide valuable guidance as you weigh the pros and cons of each approach. In turn, this should help you make an informed decision that aligns with your goals.

Having supported many searchers through the process of establishing a fund through to closing on an acquisition, we have a wide range of experience in structuring and supporting both traditional and self-funded searchers. We would be happy to help talk through your personal circumstances to support your decision-making process.

Conclusion

Ultimately, the choice between a traditional and self-funded search fund will depend on a thorough assessment of your financial resources, risk tolerance, expertise, network, time commitments, and long-term objectives. By evaluating these factors (and seeking expert advice where applicable), you can choose the most suitable path for your search fund journey.

At Gerald Edelman, we work closely with both traditional and self-funded searchers to support them at every stage of their journey. Our Deal Advisory team can help identify acquisition opportunities and assess their strategic fit, while our Transaction Services specialists offer tailored financial and tax due diligence as well as advice on how best to structure your deal.

Whether you’re pursuing a traditional route with investor backing or a more independent, self-funded approach, GE is well positioned to offer practical, hands-on support throughout the process, contact one of our experts below.