This newsletter is guest written by Grant Hensel, Managing Partner of Entrepreneurial Capital. You can connect with Grant on LinkedIn. Be sure to read until the end to see his criteria for investing in self-funded searchers.

What are Market Terms for Self-Funded Searchers Raising Equity Investment?

The world of self-funded search investing has matured quickly in recent years.

While every deal is different, a fairly consistent set of economic and structural norms has emerged. If you’re raising capital, knowing how investor terms work in advance will position you as a very credible searcher.

At the highest level, investors underwrite self-funded search opportunities with conservative assumptions.

They’ll take the business’s historical performance and build a model that assumes ~5% annual revenue growth (if historically justified), flat margins, and an exit at the same multiple paid on acquisition, typically 7–10 years later. For most investors, that model needs to show an IRR of at least 30–35%.

Four key tools make that math work:

1. Preferred Return
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2. Distribution Waterfall (Return of Capital)
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3. Step-Up
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4. Minority Investor Protections

Let’s take each in turn.

1. Preferred Return

Under SBA rules, investors can’t require distributions at any point, but they can structure their equity as a participating preferred that accrues a preferred return if unpaid.

Typical preferred returns range from 10–15%, sometimes with lower rates if the return is paid in cash rather than accrued. Importantly, the searcher always has discretion to let the preferred return accrue rather than pay it out.

This structure compensates investors for the illiquidity and risk of the deal while still giving the searcher breathing room in the early years of ownership.

2. Distribution Waterfall

Although investors usually contribute the majority of the equity, they’re minority owners in the business. To balance that, any distributions (other than tax distributions) follow a waterfall:

1. Preferred Return – Accrued or unpaid preferred return comes first.
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2. Return of Capital – Investors (and the searcher, if they invested cash) get back their contributed capital.
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3. Pro-Rata Split – After capital is returned, profits are split according to ownership—typically 60–80% to the searcher, 20–40% to investors.

In well-aligned structures, any money the searcher personally invests is treated exactly like investor money, earning the same preferred return and participating in the return-of-capital waterfall.

Note: Each investor must stay below 20% ownership, since that would require them to personally guarantee the SBA loan.

3. Step-Up

Step-Up is the mechanism that bridges the gap between economic ownership and financial contribution.

Imagine you’re buying a business earning $1M for 4x EBITDA, or $4M total.

The deal requires 15% equity, so $600K total. The searcher contributes $100K, and investors contribute $500K.

In a conventional deal, investors would own 5/6ths of the equity since they provided 5/6 of the capital. But in self-funded search, that doesn’t make sense: the searcher found the deal, is personally guaranteeing the debt, and is taking a capped salary (earning their real money through distributions and equity appreciation).

On the flip side, investors won’t accept owning only 12.5% (their $500K divided by the $4M purchase price), the investment is far too risky for that.

The compromise is the Step-Up, typically between 2.0–2.5x. Using a 2x Step-Up, investors in the example above would own 25% (12.5% * 2), and the searcher would own 75%. This preserves investor economics while rewarding the searcher’s unique role and risk.

4. Minority Investor Protections

Investors don’t have operational control, but they do have protective rights to ensure the original investment terms aren’t materially altered. These usually include approval rights for:

• Taking on new debt or issuing new equity
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• Related-party transactions
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• Increasing the searcher’s salary beyond the agreed level
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• Making acquisitions
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• Selling the business

These are designed not to interfere with daily operations, but to protect the original investment thesis.

We’re Investing in Self-Funded Searchers!

If you understand Preferred Return, Waterfalls, Step-Up, and Minority Protections, you’ll be far ahead of most searchers (and far more credible when talking with investors!).

At Entrepreneurial Capital, we’ve raised $12.5M to invest in self-funded search transactions after completing our own search and acquisition journey. I’ve been a small business owner myself for over a decade, and our team loves supporting searchers as they build enduring small businesses.

We love investing in deals with:

• $750k+ EBITDA
• Less than a 5x multiple
• Low customer concentration
• Low CapEx requirements
• Low economic cyclicality (non-discretionary products and services)

If you’re working on a deal like this, we’d love to connect! Our Chief of Staff, Peter Vaselkiv would be thrilled to talk to you and get you connected with the rest of our team. Contact Peter at Peter.Vaselkiv@entrepreneurialcapital.com​

If you're buying a business, make sure to reach out to the Pioneer Capital Advisory team:
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For pre-LOI buyers ready to explore opportunities: Schedule a meet & greet call​

Already have a deal under LOI and need financing help: Schedule an LOI consultation​

Whether you're beginning preliminary acquisition exploration or conducting due diligence on identified targets, we provide strategic guidance on financing options and lender introductions tailored to your specific circumstances.

Matthias Smith​
Pioneer Capital Advisory LLC

Disclaimer: The information in this newsletter is for informational purposes only and should not be considered legal or financial advice. Business buyers are encouraged to consult with their legal counsel and accountant to ensure the proper structuring of their transactions and to fully understand the tax implications of seller financing.

Thanks for reading! Feel free to reply directly to this email with any questions or thoughts.