Three Ways to Fund a Business Purchase

01The three paths

Every business purchase needs equity. A lender will cover most of the price, and a seller will often carry a piece, but somebody has to put real cash at the bottom of the stack. Where that cash comes from is the first decision you make, and it shapes everything after it: how much you own, who you answer to, whether you get paid while you look, and what you walk away with when you sell.

There are three ways to do it.

Self-fund. You pay the equity out of your own pocket. You own the whole company and carry all of the risk. Nobody else has a vote.

Search fund. Investors pay you a salary to go find a business, then fund the purchase when you find one. You give up most of the equity in exchange for a paycheck during the search and a backer at the table.

Independent sponsor. You find the deal on your own time, put in some of your own money, and bring investors in for the rest. Because you found it and you run it, you earn a share of the profits above what your cash alone would buy.

None of these is better than the others. Each fits a different person at a different point. The right one for you comes down to four questions.

How much cash do you have? Count only what you could write a check with in the next 90 days. Home equity and retirement accounts can become cash, and this guide covers how, but they come with strings that matter.

How much control do you want? Some people want to be the sole owner and answer to no one. Others are comfortable with a board or a group of partners, and some actively want the accountability.

How soon do you need income? A search takes 12 to 24 months on average. If you can go that long without a salary, you have options that someone who cannot does not.

What are you building? One business you run for the next twenty years is a different project than the first of several acquisitions. The second one favors a structure that pays you for finding deals.

One thing is true on every path: the search costs time and money. You will spend real dollars on legal review, quality of earnings analysis, lender fees, and travel before you ever own anything. The three paths differ in whose money and whose time gets spent, and in what you own at the end.

Quick comparison

The example we will use throughout

To keep the comparison honest, the same business runs through all three sections.

• Commercial landscaping company, 18 years old, owner retiring
• Revenue: about $4M
• Seller's discretionary earnings (SDE): about $750K
• Purchase price: $3M, or 4x SDE

The capital stack does not change either. An SBA 7(a) loan covers 80%, the seller carries 10% as a note, and 10% comes in as equity. What changes from section to section is where that equity comes from and who owns what afterward.

02Self-fund

Self-funding means the equity is yours. You write the check, you sign the loan, you own the company outright.

Who it is for. You have the cash or can get to it, you want full control, and you are buying one business to own for a long time. Many professionals with a decade or more of savings and an untouched 401k are closer to this than they think.

The tradeoff. Every dollar of upside is yours. So is every dollar of loss. There is no investor to call when the first quarter goes sideways, and there is no salary coming in while you look. You are funding the search, the purchase, and the first few months of operations out of your own reserves.

Where the money can come from

Most self-funders combine two or three of these sources. Each has a cost, and the cost is not always interest.

Savings and brokerage accounts. The simplest source. No interest, no paperwork, no one to repay. The cost is that you drain your emergency fund at the exact moment you are taking on the largest financial commitment of your life. If you go this route, set aside a separate reserve that you do not touch for the deal.

ROBS, the 401k rollover. A Rollover as Business Startup lets you use retirement money to buy a business without early-withdrawal penalties or income tax on the rollover. For a lot of professionals this is the single largest pool of idle capital they own, and it is the source most people do not know exists. The cost is concentration: your retirement is now invested in one company. It also requires a C-corporation structure and an annual compliance filing, usually a few thousand dollars a year. Use a specialist provider, because the IRS rules are specific and mistakes are expensive.

Securities-backed line of credit. You borrow against your brokerage account instead of selling it. It is fast, the rates are often low, and you avoid a taxable sale. The cost is that you now have two risks stacked on top of each other. If the market drops, the lender can demand cash or sell your holdings to cover the loan, at the same time your new business needs every dollar.

Life insurance policy loan. If you hold a whole or universal life policy with meaningful cash value, you can borrow against it. There is no credit check, repayment is flexible, and the policy keeps growing. This only works if you have real cash value built up, and unpaid loans reduce the death benefit, which matters if your family depends on it.

HELOC. A home equity line of credit is the cheapest borrowed money most people can access, with large limits. The cost is that your house is the collateral. Read the callout at the end of this section before you lean on it.

The mistake that kills self-funders

They spend everything on the purchase price and have nothing left for what comes next. The equity injection is only the first of three checks you will write. Budget for all of them.

The equity injection. SBA lenders require a minimum of 10% of the total project cost from you. On a $3M deal that is $300K.

Closing costs. The SBA guarantee fee, legal fees, a quality of earnings report, loan packaging, and an appraisal. Plan on 3 to 5% of the purchase price. On this deal that is roughly $100K.

Working capital and the first 90 days. Payroll gaps, a truck that dies in week two, a large customer who pays 60 days late, a deposit the seller did not mention. Set aside at least $50K on a business this size.

The numbers

You own 100%. When you sell, everything after the remaining debt is yours.

03Search fund

A search fund solves a specific problem: you have the skills and the drive to buy and run a business, but you do not have $450K sitting in cash, and you cannot afford to go 18 months without a paycheck while you look.

Why it exists. Most people who want to buy a business never do, because the search is a full-time job that pays nothing. The search fund model was built to fix that. Investors fund your search and your salary in exchange for the right to invest in whatever you buy, plus a premium for backing you before there was anything to back.

The position of strength. When a seller or a lender asks who is behind you, you have an answer. That changes how you get treated. Sellers take you seriously, brokers return your calls, and lenders see committed equity before you ask for a term sheet.

The tradeoff. You give up most of the equity. Investors typically own 70 to 80% of the company at close, and you hold the rest, earned over time. You also answer to a board. Major decisions, including your own salary, get approved by the people who funded you.

Two separate raises

This is the part most people miss. A search fund involves two distinct rounds of money, raised at different times for different purposes.

Stage one is search capital. A smaller pool, typically $100K to $250K, that pays your salary and expenses for 12 to 24 months while you look. It comes from 5 to 15 investors, and it is raised before you have a deal. These investors are betting on you.

Stage two is acquisition capital. The equity for the actual purchase. It is raised once you have a signed letter of intent, from the same investors first, since they have the right to participate, and then from new ones if you need more.

Search investors take the biggest risk, because you might never find a deal and their money is gone. They are rewarded with a step-up: when their search capital converts into equity in the acquisition, it converts at a premium, commonly 150%. An investor who put in $30K to fund your search gets credited with $45K of equity in the company you buy.

The offering memorandum

Before anyone writes a check for search capital, they need a document. It does not need to be long. Ten to fifteen pages is typical. It needs to cover eight things.

1. Who you are and why you are credible: your background, your track record, and why you are doing this
2. What you are looking for: industry, size, geography, and a written deal box
3. How long you expect to search and what it will cost
4. How much you are raising and from how many people
5. What investors get: the step-up, their equity, and any preferred return
6. What you get: salary, equity, and the vesting schedule
7. How decisions get made: who sits on the board and what requires approval
8. Risks, stated plainly, including the possibility that you never find a deal

Investors in this space have seen a lot of these. The ones that get funded are specific about the deal box and honest about the risks.

The numbers

Stage one: search capital

• $150K raised from 6 investors at $25K each
• Covers a $100K salary and about $50K of search expenses for 15 months

Stage two: acquisition capital

• Cash needed at close: $450K, same as the self-fund example
• Raised from 11 investors at $30K to $50K each
• The search investors' $150K steps up to $225K of equity credit

Ownership at close, simplified

• Investors: 75%
• You, the searcher: 25%

Your 25% usually vests in thirds. One third at close, one third over time as you operate, and one third when investors reach a target return. In the traditional model these are structured as separate tranches with different triggers; the 25% figure here is a simplification to keep the comparison clean.

Your income

• During the search: $100K salary from search capital
• After close: $125K to $150K salary from the business, approved by your board

Year one cash flow. Same business, same debt, so the same $335K left after debt service. Subtract your $150K salary and about $185K is available for distributions, split 75/25 or reinvested in growth.

What a sale looks like

Assume a five-year hold. You grow SDE from $750K to $1M and sell at the same 4x multiple.

Add five years of salary and whatever distributions were paid along the way. Investors got about 4x their money. You got roughly $600K, five years of income, and a business you now know how to run, with no cash in.

Key terms

Search capital

Money that funds your salary and expenses while you look.

Acquisition capital

Money that funds the purchase.

Step-up

The premium search investors receive when their money converts to equity in the deal.

Carried equity, or searcher equity

Your ownership, earned through work rather than cash.

Vesting

The schedule on which your equity becomes yours to keep.

Preferred return

A minimum return investors receive before you share in profits.

Board

Your investors, usually three to five of them, who approve major decisions.

Deal box

The written criteria for what you will and will not buy.

04Independent sponsor

An independent sponsor finds a deal first and raises money second. You have done the searching on your own time and your own dime, you have some cash to put in, and you want partners for the rest.

Who it is for. You have a target, or you are confident you can find one, and you have $100K or more to commit but not the full $450K. You want to be paid for bringing the deal and running it, on top of the return on your own cash.

How it differs from a search fund. Nobody paid you to look. That changes the economics. Instead of taking a fixed equity slice earned over time, you invest alongside your partners and earn a promote, a share of the profits above a threshold, for the work of finding, structuring, and operating the deal.

The tradeoff. No salary during the search, and you are carrying the deal costs until it closes. If it falls apart at diligence, that money is gone. In exchange, you keep more of the upside and you set the terms.

LP and GP, in plain language

Independent sponsor deals use a partnership structure with two kinds of partners.

Limited partners, or LPs, bring money. They do not run the business, and their liability is limited to what they invested. They have rights, usually around major decisions and information, but they are passive.

The general partner, or GP, brings the deal, the structure, and the operating plan. That is you. You run the company or hire the general manager who does, and you are the one the lender looks to.

How the GP gets paid

Usually all three of these, negotiated deal by deal.

A closing fee. A one-time fee for finding and closing the deal, often 1 to 3% of the purchase price. Some sponsors take it in cash, some roll it into their equity.

A management fee or salary. An annual fee for running the company, or a salary drawn from the business the same way an owner would.

The promote, also called carry. A share of profits above a preferred return to investors. Twenty percent is common. This is where sponsors make their real money, and it is why the model exists.

The numbers

Terms

• 8% preferred return to all capital, yours included
• 20% promote to you after the preferred return is paid
• Salary from the business: $125K to $150K

Year one cash flow. Same $335K after debt service, minus your salary, then distributed through the waterfall below.

What a sale looks like

Same five-year hold, same $2.4M net proceeds. Here is how the money moves.

Step one: return of capital. The $450K goes back to everyone in proportion to what they put in. $100K to you, $350K to the LPs.

Step two: preferred return. 8% per year for five years on that capital, about $180K. $40K to you, $140K to the LPs.

Step three: the promote. Of the roughly $1.77M that remains, 20% goes to you. About $354K.

Step four: the rest. The remaining $1.42M splits pro rata. About $314K to you, about $1.1M to the LPs.

Plus salary, fees, and distributions along the way. Your investors did well. You did very well, because the promote pays you for the work of finding and building the deal on top of the return on your own cash.

07Where the money actually comes from

Your first investors will be people who already trust you and are looking for something better than a savings account. They are closer than you think.

Your first circle

• Neighbors and friends who have asked what you are working on
• Family, with clear paperwork and clear expectations on both sides
• Church and community organizations
• Professional associations: bar associations, medical societies, engineering and accounting groups
• Alumni networks and fraternity or sorority chapters
• Former colleagues with an idle 401k and no plan for it

Most first raises come from 8 to 15 people at $25K to $50K each. Those are dinner table numbers. You do not need a fund, a family office, or an introduction to anyone you cannot already reach.

How to present a deal in five minutes

Use the same order every time. It keeps you disciplined and it tells experienced investors that you know what they need to hear.

The business. What it does, how long it has existed, and why the owner is selling. Two sentences.

The numbers. Revenue, earnings, purchase price, and the multiple. One table.

The structure. Where the money comes from, meaning the loan, the seller note, and the equity, and who owns what afterward.

The ask. Exactly how much you are raising, in what increments, by what date.

The risk. What could go wrong and how the structure protects them. Say it before they ask.

What people are really evaluating is whether you understood the risk. Lead with the numbers, close with the risk, and let them ask about the upside.

08Closing thought

Deal selection carries far more risk than the funding path. Buyers who lose money almost always bought a declining industry or a business they did not understand. The capital structure rarely causes the loss.

Pick the path that matches your cash, your patience, and your family's tolerance for a personal guarantee. Then spend your energy on the only thing that actually decides the outcome: buying the right business at the right price with the right protections in the contract.

This guide is educational only and is not legal, financial, or investment advice. No returns are guaranteed. Talk to your own attorney, CPA, and financial advisor before acting on anything here.