Financing An Acquisition Without A Search Fund
There are more ways to finance an SMB acquisition than the traditional search fund route. Here is how I think about the capital stack on a self-funded deal.
When acquirers think about financing an SMB acquisition, they usually default to one of two mental models. Either the traditional search fund route, where LP capital funds both the search and the eventual acquisition, or a complete buyer-funded model where the acquirer brings cash to the table for the entire purchase price. The reality is that most deals I work on use a third path, a self-funded acquisition with a capital stack that draws from multiple sources.
The four layers of a typical SMB capital stack
A self-funded acquisition usually combines four sources of capital, in different proportions depending on the deal.
The first is the buyer's equity contribution. This is the cash the acquirer is putting in personally, plus any co-investment from operating partners or family-and-friends capital that the acquirer is bringing to the deal.
The second is SBA financing. The SBA 7(a) program is the most common tool for SMB acquisitions in the United States, with loan sizes up to five million and amortization periods of ten years for asset-based deals or twenty-five years if real estate is involved.
The third is seller financing. The seller takes back a note for a portion of the purchase price, usually subordinate to the SBA loan, with interest and a defined amortization schedule. Seller financing aligns the seller's interest in the post-close success of the business and reduces the equity check the buyer has to write at close.
The fourth, when relevant, is mezzanine or unitranche debt for larger transactions where the SBA cap is constraining and the buyer wants to avoid bringing more equity.
Why the mix matters
The mix is not just a financing question. It is a control question and a flexibility question.
A deal financed seventy percent SBA, twenty percent seller note, and ten percent buyer equity has a high debt service load that constrains the operating decisions the new owner can make in the first three years. A deal financed forty percent SBA, twenty percent seller note, and forty percent buyer equity has more operating flexibility but requires the buyer to put more cash in.
The right mix depends on the EBITDA stability of the business, the buyer's risk tolerance, and the strategic intent for the post-close period. A business with very stable cash flows can support more leverage. A business with seasonality, customer concentration, or any kind of regulatory variability deserves a more conservative stack.
Where seller financing earns its place
I push for seller financing on most deals I run. It does three things. It reduces the upfront equity the buyer has to commit. It signals to the SBA lender that the seller has confidence in the post-close success, which often improves loan terms. And it gives the seller a continuing financial interest in the business that aligns their behavior during the transition.
A seller who is genuinely confident in the business and the buyer will accept seller financing. A seller who pushes back hard on any seller note is sending a signal worth listening to.
What I do not finance with
I do not use mezzanine debt at SMB scale unless the deal economics genuinely require it. The cost of capital is high enough that it changes the operating decisions the new owner can make in ways I prefer to avoid.
The right capital stack is the one that lets the operator focus on the business instead of the debt service.
Written by Ramy Stephanos, SFAdvisor - Acquire.