When looking to launch a search fund there are two potential models which can be used (traditional or self-funded). In this article we highlight how the experience differs between the models at the 5 key stages of a typical search fund lifecycle.

The two most common models of search fund are traditional and self-funded. The traditional model sees a searcher initially raise a smaller amount of “search capital” (say £400k) which is used to fund living and operating expenses and other costs over the search phase (transaction and broken deal fees etc). This funding is expected to cover a 2-year window. Once a target has been identified and a deal is progressing a traditional searcher will then raise a larger balance of “acquisition capital” to complete the transaction. A traditional model searcher will typically be awarded with 8% of the equity at completion, with two other (8%) tranches being awarded later based on time and achieving targets on exit (max 25% equity).

Self-funded searchers forego the initial search capital, instead funding their living and operating expenses themselves. Once a deal is identified they will then take it to investors to raise the necessary equity to complete. Self-funded searchers will typically take a majority stake of the company they acquire. Both models usually see the maximum amount of debt financing available utilised, with equity financing and then potentially a vendor loan note and/or an earn out filling the gaps to make up the total consideration. While utilised by both models we have found that self-funded searchers typically make greater use of vendor loan notes when structuring the consideration. In our experience at Buzzacott, in previous years we found the self-funded model to be more common. However, a greater number of institutionalised search investors along with the establishment of accelerator programmes has seen a rise in the traditional model. We now see traditional model searches making up the majority of transactions being completed.

In this article we highlight how the experience differs for a traditional vs a self-funded searcher at various stages of the overall process.

Search phase

Right from the outset a key distinction will emerge between the two models in terms of the size of company targeted and the approach taken.

Although there are some outliers in both models, self-funded searchers will typically target smaller deals (£1m - £10m Enterprise Value) whereas traditional searchers will target larger (£5m - £50m). Both are usually sector and geographically agnostic, however if you do wish to implement certain parameters (such as limiting the geography of your search to a particular region) then it is more straightforward to do this under the self-funded model.