The same business outcome pays an LP very different amounts depending on the deal structure. In this illustrative model, terms create little difference at 1.5x and a much larger gap at 5x.
At a 5x gross return on an illustrative $5.5M of LP cash, a search fund LP nets 4.20x, an independent sponsor LP nets 4.06x, and a self-funded search LP nets 2.90x [illustrative model]. At 1.5x, all three pay almost the same amount. The 5x gap is not the business performing differently. It is the contract.
Same business, three different checks
The figure below walks through one illustrative exit at four gross multiples: 1.5x, 2x, 3x and 5x. Watch the bar for each structure move against the thin reference line, which marks what the business itself made. The gap between the line and the bar is what the searcher or sponsor kept.
Same exit, three different checks
Grouped bars for search fund, self-funded search and independent sponsor LP net multiples at four gross exit multiples. At 1.5x all three pay about 1.5x. At 5x the search fund LP nets 4.20x, the independent sponsor LP nets 4.06x and the self-funded LP nets 2.90x.Gross exit multiple: 1.5x
Search fund
Self-funded search
Independent sponsor
The thin vertical line marks what the business itself made (the gross exit multiple). The gap between it and the bar is what the searcher or sponsor kept.
At 1.5x gross, the three structures pay an LP almost the same amount. Losses and small gains are shared the same way.
Source: Illustrative waterfall model built from published deal terms, not the terms of any SMBIN or third-party offering. Search fund: 1.5x step-up on search capital1, searcher's performance tranche vests between a 20% and 35% net IRR2. Self-funded search: 8-15% preferred return, 1.5x-2.5x step-up3, searcher keeps 60-70% of the residual after the pref4. Independent sponsor: 8% compounded pref, 100% catch-up to 20%, 80/20 split to 2.0x5. Common assumptions: $5.5M total LP cash, five-year hold, identical gross exit value across structures.
Figure data
| Gross exit multiple | Search fund LP net | Self-funded search LP net | Independent sponsor LP net |
|---|---|---|---|
| 1.5x | 1.50x | 1.50x | 1.47x |
| 2.0x | 1.92x | 1.85x | 1.80x |
| 3.0x | 2.75x | 2.20x | 2.56x |
| 5.0x | 4.20x | 2.90x | 4.06x |
Illustrative waterfall model; same gross exit across structures.
The model behind that figure uses published deal terms, not invented ones: a 1.5x step-up on search capital1, a searcher performance tranche that vests between a 20% and 35% net IRR2, an 8% to 15% preferred return with a 1.5x to 2.5x step-up for self-funded searchers3, and an 8% compounded preferred return with a full catch-up to a 20% promote for independent sponsors5. Every output is illustrative. It is not the terms of any SMBIN or third-party offering, and it is not a return forecast.
The four terms that decide your payout
Read a term sheet for the number that moves your money at a specific outcome range, not the number that sounds best in a pitch.
- Step-up on search capital. A traditional search fund converts search capital into acquisition equity at roughly 150% of the original investment1. In self-funded search deals, a 2x step-up implies something close to a 50/50 debt-to-equity structure; some run 70% to 80% debt with only a 1.5x step-up instead6. The step-up alone tells you little without the capital structure behind it.
- Preferred return and whether it compounds. Self-funded searchers commonly carry an 8% to 15% preferred return with a 1x liquidation preference3. A podcast guest on The SMB Investor described a similar range, 10% to 15%, with entrepreneurs keeping 60% to 70% of the residual after the pref4. The cited worked example assumes an 8% compounded pref with a full catch-up5.
- The searcher's common equity and how it vests. Traditional search fund entrepreneurs typically vest into 25% to 30% of common equity across three equal tranches: one at acquisition, one on a four- to five-year time schedule, and one on performance, which starts vesting at a 20% net IRR to investors and is fully earned at 35%2. Solo searchers cap at 25%, pairs at 30%.
- Promote tiers and the catch-up. Independent sponsor surveys report a 2% closing fee as the most common structure (67% of respondents) and a 5% of EBITDA management fee as the most common (76%), with 78% using a full catch-up and 60% obtaining a maximum carry of at least 25%7. These describe survey respondents, not the terms of this model or any offering. A separate survey of 300-plus deals found the most common closing fee band ran 2.00% to 2.49% of enterprise value, with 71% of deals using a variable-carry hurdle structure8.
Takeaway: each term moves money only at a specific outcome range. Know which range applies before you compare deals on the headline terms alone.
The traditional search fund, worked
Median capital raised per searcher rose to $500K for 2022 to 2023 launches, with a median of 12 investors per fund and a median raise time of three months9. Stanford calculates returns for original search investors on a cash-flow basis that includes losses from searches that never reached an acquisition, and excludes follow-on financing10.
Yale's illustrative model assumes a redeemable participating preferred security with no entrepreneur catch-up. In its base case ($10M enterprise value at 5x on $2M EBITDA, $5M debt, $500K search capital rolled in at a 1.5x step-up, five-year hold), the result is a 26% IRR and $2.61M to the searcher11. Move the entry multiple and the payout moves with it: $3.51M at a 4x entry, down to $1.89M at 6x and $1.36M at 7x12. Per the underlying Stanford data, 27 of 166 search fund companies, or 16%, delivered $10M or more to their entrepreneurs13.
Takeaway: search investors fund the search. If an acquisition closes, those investors receive the step-up when their search capital converts into acquisition securities1.
Self-funded search, worked
Community-reported terms for self-funded search equity run an 8% to 15% preferred return, a 1x liquidation preference, and a 1.5x to 2.5x step-up on search capital3. A guest on The SMB Investor podcast described a similar structure: a 10% to 15% pref, with entrepreneurs retaining 60% to 70% of what is left after the pref is paid4. One family office's own guide describes traditional search capital of $400K to $500K converting at 150% (for example, $450K becomes $675K of equity), and notes that self-funded searchers typically carry unlimited personal guarantees on their acquisition debt14.
Takeaway: this structure behaves like a preferred return with a kicker attached. In this illustrative model, it is relatively strong up to about 2x and pays the LP less than the other two structures at 5x and above.