What Is Self-Funded Search Investing? A Comprehensive Guide

By Sean Smith, Managing Partner, Search Fund Ventures

TL;DR — Self-funded search is an entrepreneurial acquisition model where individuals personally fund their search for a small business to acquire, then raise capital from investors only when a deal is ready to close. For investors, it offers access to attractive risk-adjusted returns in an underserved segment of the market.

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What Is Self-Funded Search?

Self-funded search represents one of the most compelling pathways into business ownership for ambitious entrepreneurs—and a unique investment opportunity for accredited investors seeking exposure to small business acquisitions.

At its core, self-funded search is a model where an individual (the "searcher") personally funds their search for a company to acquire, rather than raising capital from investors during the search phase. The searcher invests their own time, savings, and sweat equity to identify, evaluate, and ultimately acquire a small to medium-sized business—typically with annual EBITDA between $500,000 and $3 million.

Unlike launching a startup, self-funded searchers acquire existing, profitable businesses. This dramatically reduces risk by providing day-one cash flow, an established customer base, proven operations, and existing management infrastructure.

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How Self-Funded Search Differs from Traditional Search Funds

Understanding the distinction between self-funded search and traditional search funds is essential for investors considering this asset class. For a detailed side-by-side comparison, see our analysis of search funds vs. traditional PE.

Traditional Search Funds raise capital from investors (typically $400,000-$600,000) to fund a two-year search period. In exchange, investors receive the right to invest in the eventual acquisition at favorable terms, plus a portion of the searcher's equity as compensation for search-phase risk.

Self-Funded Searchers bear all search costs themselves. No outside capital is raised until an acquisition target has been identified and a deal is ready to close. This creates several important differences:

1. Economics: Self-funded searchers retain significantly more equity (often 50-80% of the post-acquisition entity) compared to traditional searchers (who typically retain 20-30%). For a detailed breakdown, read our guide to SMB private equity fee structures.

2. Investor Returns: While investors don't benefit from the search fund step-up, they often invest at more favorable valuations because self-funded searchers have stronger incentives to negotiate hard on price.

3. Deal Selection: Self-funded searchers may be more patient and selective, as they're not burning through investor capital during the search.

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The Investment Opportunity

Self-funded search investing occupies a unique position in the alternative investment landscape. The target businesses—those with $500K-$3M EBITDA—represent a sweet spot for several reasons:

• Less Competition: Too small for most private equity funds, creating less competitive dynamics and more reasonable valuations
• Transition Motivation: Often owned by baby boomers seeking retirement, creating motivated sellers — a trend accelerating rapidly as part of the silver tsunami reshaping SMB deal flow
• Improvement Potential: Frequently under-optimized with significant upside from professional management
• Financeable: Large enough to support SBA or conventional acquisition financing

Entry multiples typically range from 3-5x EBITDA, significantly below larger private equity transactions. This valuation discipline, combined with motivated operators who have significant personal capital at risk, creates attractive risk-adjusted return potential.

Historical data suggests successful self-funded search investments generate IRRs in the 25-50% range, with top-quartile deals exceeding 50%. Cash-on-cash multiples typically fall in the 2-5x range over 5-7 year holding periods.

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Key Metrics to Evaluate

When evaluating self-funded search investment opportunities, sophisticated investors focus on several key areas. For a deeper dive, see our guide on key questions to ask before investing in a search fund.

The Searcher

• Professional background and relevant experience
• Analytical capabilities and business acumen
• Leadership skills and cultural fit
• Personal investment and skin in the game
• Track record of persistence and execution

The Business

• Quality of earnings and EBITDA adjustments
• Customer concentration and retention
• Revenue trends and growth potential
• Competitive positioning and market dynamics
• Management depth and key person dependencies

The Deal Structure

• Entry valuation (EBITDA multiple)
• Capital structure and leverage levels
• Seller financing and alignment
• Governance rights and board representation
• Exit pathway visibility

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Risk Considerations

Self-funded search investing carries meaningful risks that investors should understand:

Operator Risk: The single most important variable is the searcher's ability to successfully operate the acquired business. Knowing what to look for in an operator is critical. Unlike larger PE deals with professional management teams, these investments depend heavily on one individual.

Concentration Risk: Investments in individual small businesses represent concentrated bets. Diversification across multiple deals is essential for managing portfolio risk.

Illiquidity: These investments typically have 5-7 year holding periods with no secondary market. Capital must be comfortable being locked up for extended periods.

Leverage Risk: Most self-funded acquisitions use significant debt (often 3-4x EBITDA), which amplifies both returns and losses.

Transition Risk: Ownership transitions create operational risks including potential loss of key employees, customer defections, and institutional knowledge loss.

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How to Get Started

For accredited investors interested in self-funded search, several pathways exist. If you are new to alternative investments entirely, our guide on getting started with SMB investing provides a step-by-step introduction.

1. Direct Investment: Building relationships with searchers and evaluating individual deals. This requires significant time and expertise but offers the most control and potentially highest returns.

2. Search Fund Networks: Joining investor groups that aggregate deal flow and provide due diligence support. These networks offer efficiency and diversification benefits.

3. Search Fund Funds: Investing through funds that specialize in self-funded search and traditional search fund investments. This provides professional management and instant diversification.

4. Platform Investments: Investing through platforms that curate and vet opportunities, providing access to deal flow with reduced friction.

Regardless of approach, building a diversified portfolio across 8-12+ investments is essential for managing the inherent concentration risk of this asset class.

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Learn More

This article provides an introduction to self-funded search investing, but there's much more to understand about deal structures, due diligence best practices, and portfolio construction strategies.

For a comprehensive deep-dive into self-funded search investing, download our free 24-page guide: Foundational Guide to Self-Funded Search Investing. The guide covers:

• Detailed analysis of the self-funded search asset class
• Investment structures and capital stack considerations
• The complete acquisition process from search to close
• Key investment concepts including valuation and risk mitigation
• Current market data and return benchmarks

Whether you're new to the space or looking to deepen your expertise, this guide provides the foundation you need to evaluate self-funded search investment opportunities with confidence.

Ready to start? Create your investor profile to access vetted deal flow from self-funded searchers.

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Sean Smith is Managing Partner at Search Fund Ventures, where he invests in and advises self-funded searchers pursuing lower middle market acquisitions. He can be reached through the SMB Investor Network.