What is a search fund and how does it work?

A search fund is a financing structure where an entrepreneur raises capital to search for, acquire, and operate a small to mid-sized business. The process typically involves raising initial search capital from investors, spending 18 to 30 months identifying a target company, and then assembling the debt and equity needed to complete the acquisition.

How much capital do you need to start a search fund?

Traditional search funds typically raise $400,000 to $600,000 in search phase capital to cover living expenses, deal sourcing, and due diligence costs. Self-funded searchers may spend significantly less out of pocket, though they take on more personal financial risk.

Can you use an SBA loan to finance a search fund acquisition?

Yes. SBA 7(a) loans are the most common form of senior debt in search fund acquisitions. They offer favorable repayment terms and lower down payment requirements compared to conventional loans. However, SBA loans have specific eligibility requirements and processing timelines that searchers need to plan for. Terms vary by lender and borrower qualification.

What is the typical capital stack for a search fund deal?

A common structure includes 60% to 70% senior debt (often an SBA loan), 10% to 20% seller note, and 10% to 25% equity from investors and the searcher. These percentages vary widely depending on the deal, the target company, and lender requirements.

How long does it take to secure financing for an ETA acquisition?

From LOI to close, the financing and closing process typically takes three to six months. SBA loan processing alone can take 60 to 90 days. Building adequate time into your deal timeline and engaging lenders early can help avoid delays.

What is the difference between a self-funded search and a traditional search fund?

In a traditional search fund, the entrepreneur raises investor capital to fund both the search period and the acquisition equity. In a self-funded search, the entrepreneur funds the search personally and typically relies more heavily on SBA loans and seller notes, retaining more ownership but taking on greater personal risk.

Do search fund entrepreneurs need to put their own money into the deal?

It depends on the model. Traditional search fund entrepreneurs may have limited personal capital in the deal since investors provide both search and acquisition equity. Self-funded searchers typically invest their own money into the search process and may also contribute to the down payment. SBA lenders generally expect some form of equity injection from the borrower, whether from personal funds or investor capital.

Search Fund Financing: How ETA Acquisitions Get Funded

Entrepreneurship through acquisition (ETA) has become one of the most practical paths to business ownership. Instead of building a company from scratch, acquisition entrepreneurs raise capital to search for, buy, and operate an existing small business. The vehicle that makes this possible is called a search fund.

The central challenge for every search fund entrepreneur is financing. Unlike a startup seeking venture capital or a large private equity firm writing checks from a committed fund, search fund deals rely on layered capital stacks that combine debt and equity from multiple sources. Understanding how these financing structures work is essential for anyone considering the ETA path.

This guide breaks down the key components of search fund financing, from equity raises and senior debt to seller notes and alternative funding sources.

What Is a Search Fund?

A search fund is a financing structure where an individual entrepreneur (often called a "searcher") raises capital to fund the process of finding, acquiring, and running a small to mid-sized business. The model follows a two-phase structure:

Search phase: The searcher raises a relatively small amount of capital to cover living expenses, deal sourcing costs, and due diligence during the search period, which typically lasts 18 to 30 months.
Acquisition phase: Once a target business is identified, the searcher raises additional equity and secures debt to complete the purchase.

Typical search fund acquisitions target businesses with enterprise values ranging from roughly $2 million to $20 million. These are often profitable, cash-flow-positive companies in industries like business services, healthcare services, technology, and niche manufacturing.

Search funds differ from traditional private equity buyouts in several ways. The searcher is typically a first-time operator (often an MBA graduate or someone with relevant industry experience), the deal sizes are smaller, and the capital stack structure is distinct. There is also a growing subset of "self-funded" searchers who skip the investor-backed search phase entirely and fund the search out of pocket.

How the Search Fund Capital Stack Works

The capital stack in a search fund acquisition describes how the purchase is funded across different layers of financing. Each layer carries different risk, cost, and repayment terms.

A simplified capital stack for a typical search fund deal might look like this:

Senior debt (SBA or conventional loan): 60% to 70% of the purchase price
Seller note: 10% to 20% of the purchase price
Equity (investor capital and/or searcher contribution): 10% to 25% of the purchase price

These percentages vary significantly depending on the deal, the lender, the seller's willingness to carry financing, and the strength of the target company's cash flow. Some deals include mezzanine debt or other subordinated financing layers as well.

The key principle is that no single source typically covers the entire purchase. Search fund financing is almost always a blend. For a deeper look at acquisition financing structures, see our business acquisition loan financing guide.

Equity: Search Fund Investors and Raises

Equity is the foundation of the traditional search fund model. There are two distinct equity raises:

Search capital raise: Before the searcher begins looking for a business, they raise initial capital from investors. This amount typically ranges from $400,000 to $600,000 and covers salary, travel, legal fees, and other search-related expenses over the search period. Investors in the search phase typically receive the right (but not the obligation) to invest in the eventual acquisition.

Acquisition equity raise: Once a target is identified and a deal is structured, the searcher goes back to investors to raise the equity portion of the purchase price. This may come from the same search phase investors, new investors, or a combination of both.

Searchers typically receive a meaningful equity stake in the acquired business (often around 20% to 30%), which vests over time. The exact terms depend on investor negotiations and the specifics of the deal. Understanding the tradeoffs between debt and equity is an important part of this process. Our post on venture debt vs. equity explores some of these dynamics.

Senior Debt: SBA Loans and Conventional Financing

SBA 7(a) loans are the most common form of senior debt in search fund acquisitions. The SBA 7(a) program is well suited to ETA deals for several reasons:

Longer repayment terms (up to 10 years for business acquisitions) help keep monthly payments manageable relative to cash flow.
Lower down payment requirements compared to conventional loans allow searchers to preserve equity and reduce the total amount of investor capital needed. See our breakdown of SBA loan down payment requirements for details.
Government guarantee (up to 85% of the loan amount) reduces lender risk and can make approval more accessible for first-time buyers.

Lenders evaluating search fund deals focus heavily on the target company's cash flow. The debt service coverage ratio (DSCR) is a critical metric. Most SBA lenders look for a DSCR of at least 1.25x, meaning the business generates 25% more cash flow than is needed to cover debt payments. Learn more about what DSCR means in business lending.

Conventional bank loans are an alternative to SBA financing, though they typically require higher down payments and may have shorter repayment terms. For a comparison, see our guide on SBA 7(a) loan requirements and how to qualify.

Seller Notes and Earnouts

Seller financing is a common and often essential piece of the search fund capital stack. In a seller note arrangement, the business seller agrees to receive a portion of the purchase price over time rather than in a lump sum at closing.

Typical seller note terms include:

5% to 15% of the purchase price, though this varies
Subordinated to senior debt, meaning the SBA or bank loan gets repaid first
Standby periods of up to 24 months if the deal involves an SBA loan (the SBA requires that seller notes remain on standby during this period)
Interest rates that are typically negotiated between buyer and seller

Sellers agree to carry notes for several reasons: it can make the deal possible (closing a financing gap), it may provide favorable tax treatment on the sale, and it signals the seller's confidence in the business.

Earnouts are a related structure where a portion of the purchase price is contingent on the business hitting specific performance milestones after closing. Earnouts can help bridge valuation gaps between buyer and seller but add complexity to the transaction.

For more on structuring acquisition deals, read about the role of an LOI in acquisition financing.

Other Financing Options for Search Fund Acquisitions

Beyond the core capital stack, search fund entrepreneurs may use additional financing sources:

Lines of credit: Post-acquisition, a business line of credit can help manage working capital needs during the transition period. See our guide on working capital financing.
Equipment financing: If the target business is asset-heavy (manufacturing, construction, transportation), equipment financing can fund specific capital expenditures separately from the acquisition loan.
Mezzanine debt: Some deals include a layer of subordinated debt that sits between senior debt and equity. Mezzanine lenders charge higher interest rates to compensate for their junior position in the capital stack.

These tools are typically supplemental rather than primary sources of acquisition financing.

What Lenders Look for in Search Fund Deals

Whether you are pursuing an SBA loan or conventional financing, lenders evaluate search fund deals based on several key criteria:

Target company cash flow: This is the most important factor. Lenders want to see consistent, verifiable cash flow that comfortably covers debt service.
DSCR: As noted above, most lenders require a minimum DSCR of 1.25x.
Buyer experience: Lenders assess whether the searcher has relevant industry or operational experience. A strong background in the target's industry can strengthen the application.
Quality of financial records: Clean, well-organized financials (ideally reviewed or audited) make the underwriting process smoother. See our list of business loan documents required to understand what lenders expect.
Industry risk: Some industries carry higher perceived risk, which can affect loan terms or approval likelihood.
Collateral: While SBA loans are primarily cash-flow-based, lenders may still consider available business and personal assets.
Personal guarantee: SBA loans require personal guarantees from anyone owning 20% or more of the business after the acquisition.

Lenders evaluate the business being acquired, not just the searcher's personal balance sheet. That said, personal credit history and financial standing still play a role in the underwriting process.

Self-Funded Search vs. Traditional Search Fund Financing

There are two primary ETA models, and the financing implications differ significantly:

Traditional search fund: The searcher raises investor capital for both the search phase and the acquisition. This model provides financial support during the search but means the searcher gives up a larger share of equity to investors.

Self-funded search: The searcher funds the search out of pocket (or through a small amount of personal savings and credit) and does not raise outside equity for the search phase. Self-funded searchers may still raise equity for the acquisition, but they often rely more heavily on SBA loans and seller notes to minimize equity dilution.

Self-funded searchers typically retain more ownership in the acquired business but take on more personal financial risk. They also tend to target smaller deals (often $1 million to $5 million in enterprise value) where the capital stack can be assembled with fewer parties.

Both models rely on many of the same debt instruments. The key difference is the role and scale of investor equity. For a broader overview of acquisition financing approaches, see how to finance a business acquisition.

Steps to Finance a Search Fund Acquisition

Define your acquisition criteria and target size. Determine the industry, geography, deal size range, and cash flow profile you are targeting.
Raise search capital (if traditional). Secure commitments from investors to fund your search period.
Identify and evaluate targets. Source deals through brokers, proprietary outreach, and industry networks.
Submit a letter of intent (LOI). Once you identify a target, submit an LOI outlining proposed terms. Read more about the role of an LOI in acquisition financing.
Secure senior debt pre-approval. Engage lenders early to understand what they will finance and on what terms. You can browse small business lenders through BreadRoute to start this process.
Negotiate the seller note. Work with the seller to structure a note that fills the gap between senior debt and equity.
Close the acquisition equity raise. Finalize commitments from investors for the equity portion of the deal.
Close the deal. Complete due diligence, finalize loan documents, and close the transaction.

This process typically takes three to six months from LOI to close, though timelines vary based on deal complexity and SBA processing times.

Common Challenges in ETA Financing

Search fund deals are not straightforward. Acquisition entrepreneurs commonly face these obstacles:

SBA loan processing timelines: SBA loans can take 60 to 90 days (or longer) to process. Building this timeline into your deal schedule is critical.
Lender unfamiliarity with the search fund model: Not all lenders understand ETA. Working with SBA-preferred lenders who have experience with acquisition financing can make a significant difference.
Balancing seller and lender expectations: Sellers want maximum price and clean terms. Lenders want conservative valuations and strong debt coverage. Navigating these competing interests requires careful negotiation.
Achieving adequate DSCR: If the target's cash flow is tight relative to the required debt payments, the deal may not pencil out. Adjusting the purchase price, deal structure, or capital stack may be necessary.
Personal guarantee exposure: SBA loans require personal guarantees, which means the searcher's personal assets are at risk.
Post-acquisition working capital: Many searchers underestimate the working capital needs of the business in the months immediately following acquisition. Planning for this in advance is important.

Being realistic about these challenges will help you plan more effectively and avoid surprises during the deal process.

Next Steps: Explore Acquisition Financing Options

Financing a search fund acquisition requires assembling multiple capital sources into a structure that works for you, your investors, the seller, and the lender. BreadRoute is a marketplace that connects acquisition entrepreneurs with lenders who specialize in business acquisition financing, including SBA 7(a) loans and other debt products.

Whether you are running a traditional search fund or pursuing a self-funded acquisition, exploring your financing options early gives you a stronger position when you find the right deal.

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This article provides general information and should not be considered financial or insurance advice. Loan terms, rates, and approval criteria vary by lender and borrower qualification.