The market for small- and lower-middle-market business acquisitions has never been livelier. Baby-boomer owners are retiring, traditional private-equity firms are moving downstream, and lenders are suddenly comfortable with seven-figure deals they once ignored. Into that mix step two breeds of entrepreneurial buyers—independent sponsors and search funders—both determined to acquire, grow, and eventually harvest businesses.
At first glance the two models look interchangeable: neither starts with a committed blind-pool fund, both rely on outside capital, and both pitch themselves as hands-on operators rather than passive investors. Dig a little deeper, though, and their playbooks, incentives, and long-term arcs diverge in ways that matter to anyone building a holding company or contemplating an entrepreneurial acquisition career.
Independent sponsors and search funders belong to the same family tree known as ETA, or entrepreneurship through acquisition. Instead of creating a venture from scratch, they scout for profitable, privately held businesses with stable cash flow, experienced workforces, and clear opportunities to add value. Both aim to:
After those broad similarities, the road splits.
Independent sponsors—sometimes called fundless sponsors—behave much like traditional private-equity professionals, minus the committed capital. They raise money on a deal-by-deal basis once they have secured a letter of intent (LOI) with a seller. In practice that means:
Because investors are putting money into a specific transaction rather than a blind pool, the independent sponsor must craft a detailed investment thesis before cash hits the wire. In return for that effort—and the risk of spending months on due diligence that may die at the eleventh hour—they seek “promote” economics that mimic private-equity carried interest. A typical arrangement gives the sponsor:
Many independent sponsors aim to build a portfolio of three to five platform companies under a loose holding-company umbrella. The ability to raise fresh equity for each deal allows them to cherry-pick industries rather than commit to a single vertical.
Search funders take almost the opposite path. They first raise a modest “search” round—usually $300,000 to $600,000—from a small syndicate of investors. That capital covers the entrepreneur’s salary and deal costs for 18–24 months while he or she scours the market full-time. When the searcher secures a target, the same investor group has the right—but not the obligation—to provide the equity required to close.
Key characteristics include:
Economics differ as well. Search fund investors usually receive preferred equity with a 7%–10% return. The searcher begins with 20% common equity that can “ratchet up” to 25% or 30% if certain IRR or multiple-of-invested-capital (MOIC) thresholds are met at exit. Unlike independent sponsors, searchers do not earn closing fees or annual management fees; their compensation comes from a modest salary and ultimately from their equity stake.
While both paths require hustle, network building, and sharp deal instincts, the mechanical distinctions shape very different day-to-day realities.
If your vision involves assembling a diversified portfolio—say a cluster of specialty manufacturing firms or a roll-up of B2B software plays—the independent sponsor path likely matches that ambition. Its deal-by-deal flexibility lets you pivot industries, sequence acquisitions based on cash availability, and invite niche operating partners into each platform without being locked into one long-term seat.
Conversely, if you’re eager to bet on yourself as an operator, crave the leadership challenge of running one business end-to-end, and value a tight knit investor-mentor group, the search fund route makes sense. The trade-off is concentration risk but also the opportunity to create transformational value inside a single company before exploring add-on acquisitions under that same umbrella.
Below is a quick decision framework many aspiring ETA practitioners use when weighing the two models:
Independent sponsors often forgo salary until their first closing fee. If you cannot self-fund 12–18 months, a search fund’s pre-funded stipend may be safer.
Do you already possess industry relationships that yield proprietary deal flow? Independent sponsors generally need a robust pipeline to keep investor confidence high.
Picture yourself in year three. Are you still energized to run sales meetings, approve payroll, and coach managers? If not, staying in a sponsor-board role might preserve your enthusiasm.
Talk candidly with potential backers. Some family offices are comfortable with carry-style promotes; others prefer the simpler search-fund structure.
If your long-term plan is a Berkshire-style permanent capital vehicle, starting as an independent sponsor can teach you to juggle multiple boards and capital stacks early.
Independent sponsors and search funders occupy adjacent lanes on the same highway toward business ownership. One emphasizes flexibility, portfolio building, and fee-plus-carry economics; the other prizes operational immersion, a streamlined investor roster, and concentrated equity upside. Neither model is objectively better.
The “right” fit boils down to your appetite for operational control, personal liquidity constraints, desired pace of acquisitions, and the culture you want to build with your capital partners. Whichever path you choose, remember that ETA success rests on fundamentals—sourcing quality businesses, paying sensible prices, and adding value through disciplined execution.
Nail those basics and you’ll have something in common with every thriving acquirer: a durable, cash-flowing foundation on which to start, acquire, and build for the long haul.
