Search Funds: The Modern Form of Business Succession

Search Funds have established themselves in recent years as an innovative alternative for business succession. This investment model offers new opportunities for both entrepreneurs and investors in the area of succession planning. In this article, you will find all essential information about Search Funds, how they work, and their significance for the German Mittelstand.

What is a Search Fund?

A Search Fund is an investment vehicle in which one or more entrepreneurial individuals (so-called "Searchers") raise capital from investors to specifically search for a medium-sized company, acquire it, and subsequently manage it as CEO. Unlike traditional private equity funds, a Search Fund is not focused on short-term resale but on long-term management with the goal of creating sustainable growth.

The concept originally comes from the USA and has developed since the 1980s. Meanwhile, the model is gaining increasing importance in Germany as it offers a solution to the succession challenges faced by the Mittelstand.

How Does a Search Fund Work?

The typical process of a Search Fund is divided into four phases:

1. Capital Raising and Formation: The Searcher raises initial capital for the search phase (typically €20,000–€50,000 per investor) and prepares an investment memorandum.

2. Search Phase: The Searcher identifies potential acquisition targets, conducts discussions, and begins initial due diligence processes. This phase usually lasts 1–3 years.

3. Acquisition: After identifying a suitable company, additional capital is raised from investors to finance the acquisition, and the purchase process is completed.

4. Management Phase: The Searcher takes over the management of the company, implements growth strategies, and works closely with the advisory board, which mainly consists of the investors.

Different Models of Search Funds

Various Search Fund models have emerged to meet different needs:

• Traditional Search Fund: Multiple investors finance the search phase and have the right of first refusal for financing the acquisition.

• Self-Funded Search Fund: The Searcher finances the search phase with their own funds and involves investors only at the acquisition stage.

• Single-Sponsor Search Fund: A single investor or investor group finances the entire process.

• Accelerator-Based Search Fund: A program that supports multiple Searchers simultaneously.

Advantages and Challenges of Search Funds

Advantages for Entrepreneurs and Sellers

• Succession planning with a committed entrepreneur who thinks long-term
• Preservation of the company’s character and corporate culture
• Access to investors’ expert knowledge
• Liquidity for the seller

Advantages for Searchers

• Opportunity to lead a company without significant personal capital
• Support from experienced investors
• Participation in the company’s success through equity ownership

Advantages for Investors

• Diversification opportunities in the Mittelstand
• Attractive potential returns (historically 30–35% IRR in the USA)
• Direct influence on company development

Challenges

• High time investment during the search phase
• Competition for attractive acquisition targets
• Differing price expectations between sellers and investors
• Cultural change within the acquired company

Search Funds Compared to Other Succession Models

Compared to traditional succession models such as Management Buy-In (MBI) or private equity acquisitions, Search Funds offer some distinct characteristics:

Aspect	Search Fund	Private Equity	Management Buy-In
Leadership	Searcher becomes CEO	Usually external management	External executive
Holding Period	Long-term (7–10+ years)	Medium-term (3–7 years)	Variable
Focus	Organic growth	Often restructuring	Depends on buyer
Capital Structure	Mostly conservative	Often leveraged	Variable
Investor Influence	High but supportive	Very high, often controlling	Lower

Search Funds in Germany

The German Mittelstand, with over 3.5 million companies and upcoming generational changes, offers an ideal environment for Search Funds. Particularly relevant are:

• Approximately 500,000 companies facing generational transitions in the coming years
• The shortage of internal family successors
• Demographic developments and increasing skilled labor shortages

However, there are also specific challenges in the German market:

• Lower awareness of the model
• Cultural differences regarding company sales
• Legal and tax particularities

Future Prospects for Search Funds

The outlook for Search Funds in Germany is promising:

• Growing awareness and acceptance of the model
• Increasing number of Search Funds focusing on the DACH region
• Emergence of specialized networks and platforms
• Internationalization and cross-border activities

Experts expect that Search Funds will play a significant role in addressing the succession challenges in the German Mittelstand in the coming years.

Conclusion

Search Funds represent an innovative and promising option for business succession, offering attractive prospects for both entrepreneurs and investors. They combine entrepreneurial commitment with professional investor involvement, creating a win-win situation for all parties involved.

For medium-sized business owners seeking a succession solution, as well as entrepreneurial individuals who want to lead a company, it is worthwhile to take a closer look at the Search Fund model and consider it in their strategic planning.

Are you interested in other financing options? Learn more about equity financing or seller financing as alternatives for your business succession.