What Search Fund Entrepreneurs Need to Know About Debt Financing

You've done the hard part — or at least what you thought was the hard part. You've raised $1-3M in equity from search fund investors, identified your target company, negotiated the LOI, and you're ready to close. There's just one problem.

You need $5-15M in debt, and you don't know where to get it.

If this sounds familiar, you're not alone. It's the single most common failure point in the search fund acquisition process, and it kills more deals than bad due diligence or seller cold feet combined.

The Capital Stack, Explained

Every business acquisition has a capital stack — the combination of equity and debt used to fund the purchase. For a typical search fund deal:

Layer	% of Deal	Source	Cost
Senior Debt	50-65%	Banks, Private Credit	8-12%
Mezzanine / Sub Debt	10-20%	Private Credit, Funds	12-18%
Seller Note	5-15%	Seller	5-8%
Equity	15-30%	Search Fund Investors	25-35% IRR target

The equity piece is usually solved through your search fund structure. The seller note is negotiated as part of the deal. But that senior debt and mezzanine layer? That's where things get complicated.

Why Traditional Banks Say No

First-time acquirers face a catch-22 with traditional banks:

1. No operating history. Banks want to see that the borrower has successfully operated a business of similar size. You haven't — that's the whole point of acquiring one.

2. SBA limitations. SBA 7(a) loans cap at $5M, which works for smaller deals but falls short for the $10-20M enterprise value range where most search fund deals land.

3. Relationship banking. Commercial lending is fundamentally a relationship business. If you don't have existing banking relationships (most first-time acquirers don't), you're starting from zero.

4. Timeline mismatch. Traditional bank underwriting takes 60-90 days. Your LOI exclusivity window is often 90-120 days, leaving almost no margin for error.

The Private Credit Alternative

Private credit has emerged as the most viable path for search fund acquisition debt. Here's why:

Speed. Private credit lenders can underwrite and commit in 2-4 weeks vs. 8-12 weeks for traditional banks.

Flexibility. They'll consider the cash flow of the target business rather than the acquirer's personal track record. If the business generates $2M in EBITDA and you're borrowing $8M, that's a 4x leverage ratio that private credit can get comfortable with.

Structure. Private credit lenders are used to creative structures — delayed draws, PIK toggles, flexible covenants — that accommodate the realities of acquisition financing.

The tradeoff? Cost. You'll pay 10-15% for private credit debt vs. 7-9% for traditional bank debt. But a deal that closes at 12% cost of debt is infinitely better than a deal that doesn't close at all.

How to Position Your Deal

When approaching debt capital, presentation matters enormously. Here's what investors and lenders want to see:

1. Clear Investment Thesis

Why this business? Why now? What's your value creation plan? Don't just show the numbers — show that you understand the business and its market.

2. Conservative Projections

Nothing kills credibility faster than hockey-stick projections from a first-time operator. Show a base case that assumes flat revenue and modest margin improvement. If the deal works on the base case, investors will get excited about the upside scenarios on their own.

3. Institutional-Grade Documentation

This is where most search fund entrepreneurs fall short. Your offering materials should look like they came from a top-tier investment bank, not a Google Doc. Professional deal memos, clear capital stack diagrams, third-party quality of earnings reports, and organized data rooms.

4. Skin in the Game

Lenders want to see that you have meaningful equity at risk. The more of your personal capital in the deal, the more aligned your interests are with your debt providers.

The Dealport Approach

At Dealport, we've built the infrastructure to make debt capital formation accessible to search fund entrepreneurs. Instead of cold-calling lenders or relying on placement agents who won't touch deals under $50M, you can:

• Structure your capital raise with professional-grade deal materials
• Access matched investors who are specifically looking for acquisition debt opportunities
• Manage compliance with automated KYC, accreditation verification, and DocuSign integration
• Track your raise in real-time with a branded investor portal

The debt gap is the biggest obstacle in search fund acquisitions. We're building the bridge.

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Ready to close your capital stack? Get started with Dealport →