What does a search fund acquisition's capital structure look like?

Two stacks, side by side

Both kinds of searcher buy the same kind of company: a profitable, established small business with a retiring or departing owner. The difference is who stands behind the buyer. A traditional search fund raises money from a group of investors before it finds a company, and those investors have the right to fund the acquisition. A self-funded searcher pays for the search personally and assembles capital only once a deal is signed. That one difference runs through every layer.

The traditional stack: investor equity with a step-up

In a traditional search fund, investors first buy units of search capital, which pay the searcher's salary and the costs of finding a company. When a deal is signed, each investor can choose whether to fund its share of the acquisition equity. Those who do convert their search capital into the deal at a step-up: a premium credited on the money they risked during the search, in return for having funded a search that might have found nothing. The step-up is agreed in the fund's documents; lenders simply see it as part of the equity.

The acquisition equity is usually structured as preferred, with a return owed to investors before common shareholders share in the proceeds. The searcher's reward is common equity, typically earned in three pieces: some at closing, some over time while the searcher runs the company, and some only if investors' returns clear set hurdles. None of this changes the loan directly, but lenders read it for two things. First, the equity is real cash from investors who have backed search deals before. Second, the searcher is paid for staying and performing, which is what a lender to a first-time CEO wants.

Because the investors expect board seats and regular reporting, traditional search deals look to a bank or private credit fund much like a small sponsored buyout. Senior cash-flow lenders to lower-middle-market companies commonly lend 2x to 3.5x EBITDA, and conventional bank lenders commonly look for debt service coverage of at least 1.25x. How lenders treat an investor-backed buyer without a committed fund is set out in financing an acquisition without a sponsor.

The self-funded stack: SBA 7(a) at the center

Most self-funded searchers use an SBA 7(a) acquisition loan because it is usually the only route that finances a large share of the price with a modest equity check. 7(a) loans go up to $5 million, and SBA guarantees 75% of loans above $150,000, up to $3.75 million per borrower. For a complete change of ownership, the equity injection must be at least 10% of total project costs.

Seller financing can count for up to half of that injection only if it is on full standby, with no principal or interest paid, for the life of the SBA loan; interest may accrue and be paid after the SBA loan is repaid. A seller note that is not on standby is allowed, but it is debt, counted in debt service rather than equity. Seller notes and SBA's full-standby rule covers how the two kinds of note are drafted.

The rules tighten on 1 October 2026 under SOP 50 10 8.1. A change of ownership must show 1.25x debt service coverage on historical results; change-of-ownership loans amortize over no more than 10 years except the real estate share; financial due diligence is required on every change of ownership; and a quality of earnings report is required on acquisitions of $3 million or more excluding real estate.

The same company, financed both ways

An illustration in plain numbers. The target earns EBITDA of 1,000, and total project costs, including the price, closing costs and working capital, come to 5,000.

The SBA structure puts much more debt on the company, which is why coverage, not the loan limit, is usually what binds. If the target's historical cash flow does not cover the payments on 4,500 of debt amortizing over 10 years with room to spare, the SBA loan shrinks and the seller note or the buyer's cash grows. The conventional structure carries less debt but needs far more equity, which the traditional searcher's investors supply. How much debt a business can carry walks through both tests.

On the SBA path the question is whether the cash flow covers the payments. On the conventional path it is also whether the equity is there.

Personal guarantees on each path

Every owner of 20% or more personally guarantees an SBA loan, so a self-funded searcher signs, and so does any investor who holds 20% or more. Some self-funded searchers keep outside investors below that level for this reason, but SBA lenders can ask for guarantees beyond the minimum, and a cap table built only to avoid signing tends to draw questions. See personal guarantees on acquisition loans.

On the conventional path the guarantee is negotiated. Lenders to investor-backed search funds usually rely on the company's cash flow, its assets and the investors' equity beneath them, and many do not ask the searcher for a full personal guarantee. Some ask for a limited one, capped in amount or released once the loan has paid down; limited versus unlimited personal guarantees explains the difference. The searcher gives up the SBA path's low equity requirement and gains a smaller personal exposure.

What the seller can be paid with

The path also decides which tools can bridge a gap between the seller's price and what the lender will fund.

• Earnouts. SBA prohibits an earnout to the seller in a change of ownership it finances. In a conventional deal an earnout is possible, subordinated to the senior loan, and lenders count any payment it could require in their coverage case. Earnout versus seller note compares the two.
• Seller notes. Available on both paths, but on the SBA path a note either sits on full standby for the life of the loan, and can then count toward the injection, or is paid currently and counts in debt service. Conventional lenders set their own subordination terms and often allow scheduled payments while the company meets its covenants.
• Rollover equity. In an SBA complete change of ownership the seller may not stay on as an owner, officer or employee, so the seller cannot keep a stake. Conventional deals often use rollover equity to keep the seller invested.
• Transition help. Under SBA, the seller may consult for up to 12 months, or up to 24 months under SOP 50 10 8.1 from 1 October 2026. Conventional deals set the transition by agreement.

What lenders on either path need to see

Whichever path, the lender underwrites the target first and the searcher second. The file needs the target's latest full year of figures, never an older year, the letter of intent, business tax returns for two to three years, the P&L, a year-to-date P&L through last month-end, the balance sheet and a debt schedule. SBA lenders add personal tax returns and a personal financial statement for each 20%+ owner, and the searcher's resume to support the management experience assessment on Form 1919. The transition plan matters on both paths, because a first-time CEO is the risk every lender prices.

Of the 1,800+ lenders in Transparent's book, 278 write SBA 7(a) and 504 and 1,148 write term and private credit, and they differ widely in how they view a buyer without industry experience. Transparent builds the full lender package in a day once the documents are in. The routes themselves are compared in how searchers finance an acquisition and traditional versus self-funded search.