Understanding the differences between independent sponsors and search funders

In the world of business acquisitions, two distinct models have emerged: independent sponsors and search funders.

Independent sponsors are flexible dealmakers who partner with investors on a case-by-case basis, while search funders are driven entrepreneurs focused on acquiring and leading a single business.

In this article, we break down the key differences between these two approaches to help you understand which model might be the right fit for your investment strategy or career aspirations.

What is an independent sponsor?

Independent sponsors, or “fundless sponsors,” are individuals or small groups that seek to acquire a company without raising a traditional fund beforehand. Instead, they typically partner with investors or private equity firms on a deal-by-deal basis.

Unlike traditional investment firms, independent sponsors do not have a committed pool of capital. Instead, they identify potential acquisition targets and then secure funding from investors for each specific deal. This model allows independent sponsors to be more flexible in terms of deal size, strategy and timing since they are not bound by the constraints of a fund’s investment mandate.

Independent sponsors may also take on operational roles in the companies they acquire or bring in a known management team to apply their theses. This model has become increasingly popular as it allows for more tailored investment opportunities and can attract investors looking for specific deals rather than broader fund exposure.

What is a search funder?

A search funder refers to an entrepreneur seeking capital to locate, acquire and run a single business. These individuals often begin their initiative soon after completing an MBA degree, and almost always serve as the CEO after acquiring the business.

Search funders typically start by raising funds from investors or private equity firms to cover the costs of their search. This initial capital is used for salary, operational expenses and due diligence costs. Once the capital is secured, search funders actively seek out a target company to purchase, focusing on small to mid-sized businesses with stable cash flows, growth potential and a strong market position.

The search funders aim to generate returns for their investors through the appreciation in value of the acquired business, which can be realized through eventual sale or other exit strategies, but the process can span several years. This model also allows aspiring entrepreneurs to enter the world of business ownership. It has gained popularity as a viable path for those looking to acquire and grow existing companies rather than starting new ventures from scratch.

Core differences between an independent sponsor and a search funder:

Both investment models can have significant upside for the stakeholders involved. Whether you’re an investor or someone looking to run a business, here are a few core differences to consider:

Role post-acquisition:

Independent sponsors: Can serve as CEO but often act as advisors or board members.

Search funders: Almost always become the CEO.

Target business size:

Independent sponsors: Seek larger companies.

Search funders: Focus on smaller, cash-positive businesses.

Career stage:

Independent sponsors: Usually more experienced.

Search funders: Typically, earlier in their careers.

Funding timing:

Independent sponsors: Secure funding on a deal-by-deal basis after identifying targets.

Search funders: Raise capital before seeking a business.

In short, independent sponsors are individuals or small groups who acquire companies by securing funding on a deal-by-deal basis without raising traditional funds, while search funders are entrepreneurs who raise capital to locate and run a single business, typically becoming the CEO post-acquisition.

To learn more, contact Sean Curley at (336) 217-9125 or sean.curley@charlesaris.com.