Traditional, self-funded, accelerator or sponsored: choosing how to fund a search in India
Angelo WilsonFinancial AnalystEach model as Darden sets it out, then tested against Indian lending rules, foreign exchange law and what a seller will wait for.
Summary
- Choosing how to fund a search comes down to two questions: who pays for the search, and who decides which business gets bought.
- In India a third question weighs as much: where the money sits. Money from abroad brings India's foreign exchange law with it, and India's 2026 bank rules leave a newly formed buying company without bank finance for the purchase.
- The US self-funded model rests on a government-guaranteed loan for buying a business, and India has no scheme built for that. Here, more of the price comes from the searcher, from costlier lenders and from the seller.
A searcher, someone who sets out to buy one business and run it, has to decide how the search is paid for before meeting a single seller. Four models are in common use.
Who pays, who decides, and where does the money sit?
Every funding model answers two questions. Who pays for the months of searching, before any business has been found? And who has the final say when the searcher wants to buy one?
Whoever holds the final say can stop a deal the searcher believes in. In three of the four models, that is someone other than the searcher.
Whoever holds the final say can stop a deal the searcher believes in.
In India a third question matters as much: where the money sits. If investors abroad own or control the buying company, the Foreign Exchange Management Act () governs the price, the reporting and any part paid later.
Debt is the other half of that question. Under rules the Reserve Bank of India (RBI) set in 2026, banks can fund a purchase only for large, profitable buyers, so a searcher's new company borrows elsewhere.
How do the four funding models differ?
The University of Virginia's Darden School of Business published "How to Buy a Business Without Millions in the Bank" on 14 July 2025. Written by Gosia Glinska with Professor Les Alexander, it sets out four funding models.
In a traditional search, investors pay for the search, typically about two years of it. Once a business is bought, they hold the majority. The searcher can earn up to 25%, and the investors have the final say on any deal.
In India those investors are often abroad, so FEMA often comes with them.
In a self-funded search, nobody outside pays for the search. The searcher funds it from their own savings, decides which business to buy and carries the personal risk. They can end up owning a majority of the business, or all of it.
In the US this model runs on a government-guaranteed loan, and India has no such loan for buying a business.
An accelerator takes searchers through a programme in groups, or cohorts. It pays a salary, provides an office and mentoring, and puts up for the purchase. The searcher earns up to 25% over time, and the accelerator can reject a deal.
In a sponsored search, one backer, such as a or a private equity firm, pays for both the search and the purchase. The sponsor is usually the controlling shareholder, and the searcher ends up with less equity than a self-funded searcher would.
In India, Khaitan & Co reports that private equity and sovereign funds are moving towards buyouts that give them control, which is the position a sponsor takes.
Why does the US self-funded model not carry over to India?
Darden gives a common US self-funded stack: about 80% of the price borrowed through an SBA loan, a 10% seller note and 10% equity.
The SBA is the US Small Business Administration, which stands behind the bank's loan with a government guarantee. Anyone owning 20% or more of the business must also guarantee it personally, Darden notes.
A seller note is part of the price the seller agrees to take later, in instalments, much like a loan to the buyer.
India has no guaranteed-loan scheme built for buying a business.
The nearest scheme is the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE). It guarantees term loans and working capital that member lenders give to micro and small enterprises, without collateral.
It was designed to fund a small business's own operations. Its FAQs say nothing about loans to buy shares or a business. Do not build a deal around it unless CGTMSE or the lender confirms in writing that it applies.
Bank finance for acquisitions arrived only in 2026. Until then, the RBI's 2012 master circular on loans and advances said banks "should not normally grant advances to take up shares of other companies".
The exceptions were narrow, such as investments in overseas joint ventures and infrastructure projects. Deals ran on unlisted debentures, internal cash and fresh equity, Khaitan & Co notes.
The RBI issued acquisition-finance directions on 13 February 2026. In force from 1 July 2026, they let banks lend up to 75% of a deal's value. The buyer funds at least 25% itself.
The buyer must be an Indian non-financial company with a net worth of at least ₹500 crore and a net profit in each of the previous three years. A company set up for the deal can borrow, but only with that buyer's guarantee.
A searcher's new company has no net worth to speak of and no record of profit. It cannot meet either test, so the new rules serve established companies buying other companies.
So a self-funded search in India usually rests on three other sources of money, each with its own cost:
- More of the searcher's own equity, with money from family, friends or angel investors, each of whom takes a share of the business.
- Credit from non-bank finance companies (NBFCs) or private lenders, at a higher cost than a bank would charge, paid from the cash the business earns.
- More of the price left with the seller, which keeps the old owner in the deal for longer.
Wadia Ghandy's guide to acquisition finance in India, written for Legal500 on the RBI's proposed rules of October 2025, makes the point on cost. NBFCs and foreign portfolio investors have historically funded domestic acquisitions at a higher price, and buyers shut out of bank finance would still rely on them.
In a 2024 interview with Moonbase Capital, Anurag Sinha, a searcher based in Hyderabad, expected his debt to come from family offices, NBFCs and seller financing. Banks, he said, rarely lent for equity deals.
How much of the price can stay with the seller?
In India, money left with the seller does much of the work that a guaranteed loan does in the US. The limits on it decide how far that money stretches.
An earn-out is part of the price paid later, and only if the business meets targets agreed at signing. Khaitan & Co finds earn-outs common when strategic buyers acquire founder-run private companies, especially in IT services.
They are usually tied to one to three years of the business's results. Escrow, where a third party holds part of the price back against claims, is also fairly common.
Where buyer and seller are both Indian residents, and foreign investors neither own nor control the buyer, how much is deferred and for how long is a matter of contract. A buyer and seller can agree a seller note over three years, or an earn-out over two.
Otherwise FEMA sets the limits, in Rule 9(6) of its Non-debt Instruments Rules. Up to 25% of the price can be deferred, held in escrow or covered by the seller's indemnity, for up to 18 months.
An indemnity is the seller's promise to repay the buyer for agreed losses. The limits apply where one side is outside India, or where the Indian buying company is owned or controlled by foreign investors. Beyond 25% or 18 months needs RBI approval.
The RBI extended the limits to foreign-owned or controlled buyers in its January 2025 master direction on foreign investment. Khaitan notes that cross-border earn-outs sit inside the same 25% and 18-month limit.
A resident seller is generally taxed in the year of transfer, even on the part of the price paid later. Under the old 1961 Act, the Bombay High Court has held that an earn-out resting on uncertain events is not taxed in that year.
Why do the traditional and sponsored routes often bring foreign money?
India has few local backers for searches: IESE Business School's 2026 study counts 8 Indian and no Indian acquisition by the end of 2025.
Sinha told Moonbase he planned to raise 70 to 80% of his capital abroad, because "there's no current success story in India".
So a traditional or sponsored search here often has foreign investors in the buying company. If they own or control the buying company, FEMA comes with them. The price must meet its pricing rules, the investment must be reported, and any deferred part stays within 25%.
A self-funded searcher using Indian money avoids most of this. One who takes money from investors abroad may not: it depends on who they are and how they invest.
Where the buying company is set up, and who owns it, decides which rules apply. Our deal structuring work starts from that question.
Answer four questions before you choose a model
Four questions narrow the choice, and three of them turn on Indian rules:
- How many months can you live without a salary? For investor-backed searches, IESE puts the median at 21 months from start to close. If you cannot fund two years yourself, someone else must pay for the search: investors, an accelerator or a sponsor.
- Will your investors be resident or non-resident? Money from abroad brings FEMA pricing and reporting into the buying company. The target's sector also decides whether that money can come in under the automatic route or needs the government's prior approval.
- How large a business do you need to buy, and can its cash carry Indian debt? Self-funded money stretches only as far as your savings, the seller's patience and credit at NBFC rates. What makes a good business to buy works a ₹20 crore purchase through on Indian terms. A bigger target needs outside equity, from a traditional search or a sponsor.
- Will the seller wait for part of the price? Between Indian residents, the contract sets how long. If anyone is abroad, or foreign investors own or control the buyer, the wait must fit within 25% and 18 months. A seller who will wait is worth most to a self-funded searcher, who has the least other money to call on.
Whichever model your answers point to, becoming a searcher in India covers the preparation.
What does SRF do for a searcher on each route?
The work on the deal is the same whoever pays for it. A letter of intent (LOI) sets the price and main terms, and is signed before full diligence. Before signing one, a searcher needs a first test of the earnings and a view on value.
Then comes the capital structure: how much is equity, how much is debt, and how much stays with the seller, within FEMA's limits where they apply. SRF's entrepreneurship through acquisition work covers the diligence, the valuation and that structure.
On a self-funded search the same work carries more weight, because no investor or sponsor checks the deal before the searcher signs.
Current as at November 2026. General guidance, not legal, tax or investment advice: take advice on your own situation.
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The services behind this article
What we do about it, for founders and finance teams. Each has its own page.
Entrepreneurship Through Acquisition
ETA and search funds in India: advice for searchers buying a business to run, owners selling to a successor, and the investors who back a search.
Deal Structuring
The instrument, the terms and the downstream consequences: the part of a deal that outlives the headline number.
Debt & Blended Finance
Working capital, venture debt and blended structures for businesses that should not be raising equity.
