How is a search fund acquisition typically financed?

Search fund acquisitions employ a balanced capital structure combining equity and debt financing, typically in a 50/50 ratio for small and mid-cap targets. This represents more conservative leverage than traditional leveraged buyouts, which often use 60-80% debt. The equity portion comes primarily from the same investors who funded the search phase. When a searcher identifies a target company, they present the opportunity to their investor base. Approximately 70% of initial search investors choose to participate in the acquisition, reinvesting their search capital plus significant additional amounts. Those who opt out receive their initial investment back with a 50% premium, incentivizing early support even if they don't participate in the final acquisition. New investors may also join at the acquisition stage, particularly if the opportunity is attractive or if additional capital is needed. Individual equity checks typically range from €50,000 to €200,000, depending on the total acquisition size. For a company valued at €10 million, total equity might be €5 million split among 15-20 investors. The debt component is usually sourced from commercial banks or specialized lenders familiar with management buyouts. Lenders evaluate the target company's cash flow stability, asset base, and growth prospects. The searcher's investor backing provides additional comfort—lenders recognize that experienced entrepreneurs are overseeing the investment. Debt terms typically include senior secured loans with 5-7 year amortization periods, interest rates tied to market conditions (currently 4-7% in Europe), covenants requiring minimum EBITDA levels and debt service coverage ratios, and sometimes subordinated debt or mezzanine financing for additional leverage. The total enterprise value of target companies typically ranges from €5 million to €30 million, with €10-15 million being most common. Purchase price multiples vary by industry but generally fall between 4-6x EBITDA, lower than what larger private equity firms pay due to less competitive processes. The capital structure is designed to be sustainable—monthly debt service should be covered by operating cash flow with margin for unexpected downturns. Unlike aggressive LBOs that maximize leverage, search funds prioritize capital preservation and business stability, recognizing that the searcher is learning operational management while servicing the debt. Working capital requirements are carefully modeled to ensure the business has sufficient liquidity post-acquisition. Some structures include seller financing, where the previous owner provides a portion of the purchase price as a loan, demonstrating confidence in the business and the buyer while reducing external financing needs.