Self-funded searchers and their acquisition opportunities often have vastly different characteristics from those of traditional search funds.

Here are two key differentiators that set self-funded searchers apart from traditional search fund entrepreneurs.

Former or current operators

“What's taught in the classroom, versus what the reality of running a business is, are two completely different things, in my opinion,” says Ryan Sims, a former investment banker and self-funded search entrepreneur. Sims currently operates two businesses out of Florida: one franchise business and another independently owned.

Like Sims, many self-funded searchers are former or current operators who are ideally situated to acquire a business regardless of whether they have the capital themselves. They know more than just the numbers but understand the inner workings of an operation aside from its balance sheet.

In Sims’ experience, SBA lenders are looking more and more at the background of business owners when lending as well. Sims noted that SBA lenders prefer to see hands-on experience with business building and operating, trying to answer questions such as “Why are you qualified to do this on the ground level and operate this business?” as more important than “What is your credit score?” Though FICO scores, collateral, capital, and business income generation potential all form part of the underwriting process, experience shouldn’t be understated.

Heavily vested in the business

Unlike traditional search fund entrepreneurs, self-funded searchers don’t use investor capital to pay themselves a salary as they search for a solid acquisition. Instead, they rely on planning their runway properly and proper planning before starting their search.

As a result, self-funded searchers seeking capital at the acquisition stage are heavily invested in the business they want to purchase—both financially and emotionally. These searchers are stepping into these businesses to be full-time operators. Often this business becomes their livelihood for years, rather than a quick buy-and-sell strategy. They want their purchased business to thrive. After all, it’s the result of months of searching on their own dime.

In addition, self-funded searchers often carry large amounts of personally guaranteed SBA debt. Some take up to 70% to 80% of enterprise value debt from SBA lenders. If their business fails, they carry the responsibility and liability for the debt instead of institutions.

Unlike traditional search methods, self-funded searchers typically end up with a majority of a business’s common equity after the deal is completed. These owners have more internal motivation to see their business succeed, which also translates to investor outcomes.

Why investing in self-funded searchers is key to building strong communities

This approach taken by self-funded searchers helps build more economic scaffolding for growth in their local communities, which can have a ripple effect in multiple industries. Investors that back local deals at the end of a rigorous search can know they are supporting a business that wants deep, community roots that benefit the ecosystem around it.

Self-funded entrepreneurs routinely employ people in their communities, adding economic growth for families and the community as a whole. There’s also the aspect of familiarity—new owners who own a majority interest in the community business become friendly neighbor owners.

On top of stimulating local economies, small businesses are well-known for their charitable work in communities. Research from the non-profit organization SCORE found that small businesses “donate 250% more than larger businesses to local non-profits and community causes,” its report states.

Investors that back deals of self-funded searchers can support local communities in powerful ways, both economically and charitably.

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