ETA Models Demystified: Choosing the Best Path for Your Acquisition Journey

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👋 Hey fellow searchers,

Choosing the right Entrepreneurship Through Acquisition (ETA) model is one of the most important decisions you’ll make as an aspiring business owner. Whether you’re prioritizing control, equity ownership, or access to resources, the model you choose will shape your journey from search to acquisition and beyond.

Today, we’re breaking down five popular ETA models — Traditional Search Fund, Self-Funded Search, Sponsored Search, Incubated Search, and Crowd-Funded Search — to help you determine which approach aligns best with your goals, risk tolerance, and available resources. Let’s dive in!

1. Traditional Search Fund

The traditional search fund is the original ETA model, dating back to the 1980s at Stanford Business School. Entrepreneurs raise capital upfront from investors to fund their living expenses and the costs associated with the search process. Once a target business is identified, these same investors fund the acquisition in exchange for equity.

How It Works:

• Searchers raise initial capital from 10–20 investors to cover a 1–2 year search period.

• Once a business is found, investors contribute additional funds for the acquisition.

• Searchers typically earn a small salary during the search phase and retain 15–30% equity post-acquisition, depending on performance.

Pros:

• Significant Resources: Ample upfront funding allows searchers to focus full-time on identifying larger, profitable businesses.

• Mentorship: Investors often bring operational expertise, providing guidance through the search and beyond.

Cons:

• Diluted Ownership: Searchers retain a smaller equity stake, as most of the equity goes to investors.

• Shared Control: Investors often require approval for key business decisions, reducing operational autonomy.

2. Self-Funded Search

A self-funded search allows entrepreneurs to bypass institutional investors by using personal savings or funds from close connections. This model is particularly appealing for those who prioritize ownership and autonomy.

How It Works:

• Searchers cover their living expenses and search costs out-of-pocket (or through family/friends).

• Acquisition funding typically comes from SBA loans, seller financing, or investors brought in at the deal stage.

• Searchers retain 70–100% equity, depending on how much outside capital is needed for the acquisition.

Pros:

• Full Control: Searchers make decisions independently, from search strategy to operational choices post-acquisition.

• Higher Equity: By assuming more risk upfront, searchers retain a majority or full ownership stake.

Cons:

• Personal Financial Risk: Requires substantial personal investment to fund the search phase.

• Resource Constraints: Without institutional backing, searchers may have fewer tools and less capital to conduct an extensive search.

3. Sponsored Search

A sponsored search blends elements of traditional and self-funded models. Instead of raising a search fund upfront, entrepreneurs secure a commitment from one or more investors who agree to fund the acquisition when a suitable target is found.

How It Works:

• Searchers use personal or borrowed funds to finance the search phase.

• Investors evaluate and commit capital on a deal-by-deal basis, often negotiating specific equity splits depending on the business’s performance potential.

• Sponsored searches often target niche markets or businesses with unique value propositions.

Pros:

• Flexibility: Searchers retain control over the search process without initial investor oversight.

• Access to Capital: Pre-committed sponsors provide credibility with brokers and sellers.

Cons:

• Uncertain Funding: Investors may back out if they don’t see value in the identified deal.

• Pressure to Perform: Sponsors often expect faster results compared to traditional investors.

4. Incubated Search

Incubated searches involve joining an ETA-focused organization or incubator that provides funding, mentorship, and operational support in exchange for equity. These organizations often help searchers refine their approach and connect with high-quality business opportunities.

How It Works:

• Entrepreneurs are selected to join an incubator, receiving a stipend, office space, and administrative support.

• The incubator helps searchers develop their criteria, source deals, and conduct due diligence.

• In return, the incubator takes a substantial equity stake in the acquired business.

Pros:

• Built-In Network: Access to experienced mentors, deal flow, and vetted resources.

• Reduced Financial Risk: Living expenses and search costs are covered by the incubator.

Cons:

• Reduced Equity: Incubators often take a larger equity stake than traditional search fund investors.

• Limited Autonomy: Searchers may need to align their acquisition strategy with the incubator’s priorities.

5. Crowd-Funded Search

A self-funded search allows entrepreneurs to bypass institutional investors by using personal savings or funds from close connections. This model is particularly appealing for those who prioritize ownership and autonomy.

How It Works:

• Entrepreneurs use crowd-funding platforms or outreach to attract a large pool of individual investors.

• Capital is raised in smaller increments from many backers, either for the search phase, acquisition, or both.

• Equity is distributed proportionally among contributors.

Pros:

• Broad Funding Base: Tapping into a larger group of investors can accelerate fundraising.

• Entrepreneur-Friendly Terms: Searchers often retain more equity compared to institutional funding.

Cons:

• Complex Coordination: Managing multiple investors can complicate governance and decision-making.

• Limited Expertise: Crowd-funded backers may lack the experience and mentorship of traditional investors.

Final Thoughts

The ETA model you choose will shape your journey as an entrepreneur, from your search process to how you operate your future business. To make the best choice, it’s important to evaluate your unique priorities and circumstances. Here are a few key factors to consider:

• Equity Goals: If retaining a majority stake is critical, consider self-funded or crowd-funded searches. If you value access to resources, traditional or incubated searches may be a better fit.

• Risk Tolerance: Are you comfortable with personal financial risk? Self-funded searches demand it, while traditional and incubated models spread the risk across investors.

• Operational Support: If you need guidance and infrastructure, traditional and incubated searches provide extensive support. For independent operators, self-funded and crowd-funded searches offer more autonomy.

Each model presents unique opportunities and trade-offs. By aligning your choice with your goals, resources, and risk tolerance, you can set yourself up for a successful acquisition journey.

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DISCLAIMER: This newsletter is for informational purposes only and should not be considered financial advice. It offers analyses of businesses without endorsing any specific financial actions. Readers are advised to do their own research and consult a professional before making investment decisions.