How Does a Search Fund Find the Right Target Companies?
Learn which criteria a Search Fund considers when selecting target companies. How to find suitable target companies for a Search Fund?
The identification and selection of the right acquisition target is the most critical success factor in the Search Fund process. A systematic approach with clear criteria increases the likelihood of finding a company that meets both the investors’ requirements and fits the Searcher’s profile. This article highlights the key selection criteria and presents effective methods for sourcing companies.
What fundamental criteria apply to Search Fund target companies?
Search Funds typically focus on companies with certain core characteristics that make a successful acquisition and further development more likely.
1. Size and Financial Metrics
Most Search Funds concentrate on mid-sized companies of manageable scale. Typically, these are firms with revenues between €3 million and €30 million and EBITDA ranging from €0.5 million to €5 million. This size allows for a financeable acquisition with valuation multiples between 4 and 8 times EBITDA.
Companies with 10 to 100 employees are especially attractive for a Search Fund, as they already have established structures but still offer room for professionalization. Proven financial stability with positive cash flows over at least 3-5 years and ideally above-average profit margins is also important.
2. Industry and Business Model
Successful Search Fund acquisitions are often found in non-cyclical industries with established markets. Business models generating recurring revenues are particularly valuable because they provide planning security and maximize customer lifetime value.
The B2B sector often offers more stable customer relationships than B2C and typically requires lower marketing budgets. High gross margins above 40% create financial leeway for growth investments after acquisition.
Companies with low disruption or regulatory risks are especially attractive, as they offer greater predictability for the post-acquisition phase.
3. Growth Potential
An ideal acquisition candidate has realistic growth potential that the Searcher can unlock after the takeover. This can include organic growth in the existing market or opportunities for cross-selling additional products and services.
Many successful Search Fund acquisitions benefit from companies with potential for geographic expansion or digitalization of existing processes. In fragmented markets, a roll-up strategy with targeted add-on acquisitions can also be an attractive growth path.
4. Operational Characteristics
From an operational perspective, companies with low capital intensity and good scalability are particularly interesting. These enable growth without proportional cost increases, thereby enhancing profitability during expansion.
Documented and reproducible operational processes significantly reduce acquisition risk. Equally important is a transferable management team that is not overly dependent on the previous owner.
A clear differentiation or niche leadership also provides protection against aggressive competition and supports sustainable margins.
Which criteria are crucial for risk minimization?
Alongside growth opportunities, avoiding excessive risks is a central concern in company selection.
1. Customer Concentration
High dependence on a few key customers poses a significant risk. Ideally, no single customer should account for more than 10-15% of revenue to limit vulnerability in case of customer loss.
Analyzing customer distribution and historical churn rates provides important insights into the stability of the customer base. Contractually secured long-term customer relationships can partially offset concentration risk.
2. Supplier Dependence
Similarly problematic can be high dependence on individual suppliers. An ideal acquisition candidate has alternative sources for critical components or has secured supplier relationships through long-term contracts with price guarantees.
Evaluating the replaceability of key suppliers should be a fixed part of the Due Diligence process to identify potential supply bottlenecks early.
3. Personnel Risks
In mid-sized companies, knowledge and experience often concentrate on a few key individuals. A broader distribution of competencies significantly reduces this risk.
Analyzing employee structure and turnover rates provides insights into personnel stability. For identified key personnel, retention programs can reduce the risk of losing critical skills after acquisition.
4. Technology and IP Risks
Protected and well-documented intellectual property rights are an important value driver. Outdated technology or a weak position in intellectual property can jeopardize long-term competitiveness.
A thorough analysis of the technology position relative to competitors should therefore be an integral part of company valuation.
Which succession criteria are particularly important?
The succession situation itself is a critical factor for acquisition success.
1. Seller Motivation
A seller with a clear exit intention for understandable personal reasons such as retirement or health issues is a positive signal. Unclear or changing sales intentions, on the other hand, indicate potential difficulties in the transaction process.
Open discussions about the seller’s motives help assess their seriousness. Willingness to agree on earn-out arrangements or a structured transition phase is another positive indicator of a cooperative handover.
2. Management Structure
An existing second management level greatly facilitates the takeover. If all decisions run through the owner, there is a high risk of business interruptions during the transition.
Analyzing the organizational structure and decision-making processes provides insights into dependence on the previous owner. A functioning operation even during extended owner absence is a positive sign for a smooth handover.
3. Transition Period
A structured transition period of 6-12 months enables orderly knowledge transfer and gradual assumption of customer relationships. An immediate full withdrawal of the seller increases the risk of continuity breaks.
Willingness to negotiate the transition period and the existence of a structured handover plan with clear milestones are important success indicators for the post-acquisition phase.
How to find suitable target companies for a Search Fund?
Systematic searching for suitable acquisition candidates requires a combination of different methods and tools.
1. Systematic Market Research
A structured search process begins with identifying attractive industries based on macro trends and one’s own competencies. This is followed by detailed market analysis regarding size, growth, and competitive dynamics.
Creating a broad longlist of potential candidates and systematically filtering them according to defined criteria ultimately leads to a prioritized shortlist of the most promising companies.
2. Using Traditional Company Marketplaces
In the DACH region, various platforms exist where companies are offered for sale. These include specialized succession marketplaces like DUB or Nexxt-Change, general M&A platforms, and industry-specific portals.
Regional offerings from chambers of commerce can also be valuable sources for potential acquisition candidates.
3. Viaductus Meta-Search as an Efficient Tool
The Viaductus Meta-Search is the only tool providing a comprehensive overview of the entire public market for company sales. By aggregating searches across all relevant company marketplaces and presenting information uniformly, the search becomes significantly more efficient.
Intelligent filtering options allow precise narrowing according to relevant criteria. The complete market overview reduces the risk of overlooking attractive offers. Active notifications also automatically inform about new suitable listings.
This meta-search is thus an indispensable tool for Search Fund operators to efficiently capture the entire market and focus on the most promising candidates.
4. Direct Contact (Proprietary Deal Flow)
Besides public listings, direct outreach is an important channel. Cold calling companies not publicly offered can provide access to exclusive acquisition opportunities.
Participation in industry events, collaboration with tax advisors and lawyers, as well as contacts with regional economic development agencies expand the network for potential acquisition candidates. Alumni networks from universities and business schools can also offer valuable connections.
How does the selection process work in practice?
The typical target selection process involves several consecutive phases that progressively narrow the funnel of potential candidates.
From Initial Screening to Closing
The following table shows the typical funnel in company selection:
| Phase | Description | Typical Number | Main Activities |
|---|---|---|---|
| Initial Screening | First filtering based on basic criteria | 500-1,000 companies | Database research, criteria filtering, initial evaluation |
| Preliminary Due Diligence | Deeper review after first contact | 50-100 companies | Contact initiation, information request, NDA signing |
| Detailed Due Diligence | Thorough analysis before offer | 10-20 companies | Management meetings, site visits, financial analysis |
| Indicative Offers | Non-binding offers after positive review | 3-5 companies | LOI submission, exclusivity negotiation, full due diligence |
| Closing | Final transaction with selected company | 1 company | Purchase agreement negotiation, transition agreement, financing closing |
This structured process helps focus extensive resources for detailed review on the most promising candidates.
Which industry trends influence company selection?
When selecting target companies, current market trends should be considered as they can influence long-term business prospects.
Digitalization offers both opportunities and risks. Companies with significant digitalization potential provide substantial value creation opportunities, while outdated business models may be threatened by digital transformation.
Demographic change leads to growing sectors such as healthcare, nursing, and age-appropriate services. At the same time, skills shortages in certain industries can pose significant growth barriers.
Sustainability and ESG factors are gaining increasing importance. Companies with strong sustainability positioning often have better future prospects than those with high CO2 intensity or other environmental burdens.
Following recent economic upheavals, resilient business models are also coming into sharper focus. Crisis- and recession-resistant sectors offer more stability in uncertain times.
Which specific industries are particularly interesting for Search Funds?
Based on historical data and current trends, certain industries have proven especially attractive for Search Fund acquisitions.
Attractive Industry Segments for Search Funds
| Industry | Examples | Advantages | Growth Drivers |
|---|---|---|---|
| B2B Services | Facility management, IT services, personnel services | Recurring revenues, low capital intensity, scalability | Outsourcing trends, specialization |
| Specialized Manufacturing | Precision parts, specialty components, niche products | High entry barriers, stable margins, loyal customer base | Reshoring, quality focus, customization |
| Healthcare | Medical technology, health services, care facilities | Demographic tailwind, regulatory barriers, stable demand | Aging population, health awareness |
| Software and Tech Services | Industry software, SaaS for mid-market, IT consulting | Recurring revenues, high margins, scalability | Digitalization, cloud migration, data analytics |
| Education and Training | Professional development, training programs, e-learning | Recurring revenues, low capital intensity | Lifelong learning, skills shortages |
These industries typically combine several of the previously discussed attractiveness criteria and have proven successful in Search Fund acquisitions.
Conclusion: Successful company selection for Search Funds
Selecting the right acquisition candidate is the most important success factor in the Search Fund process. A systematic approach with clear criteria, combined with efficient search tools like the Viaductus Meta-Search, increases the likelihood of finding a suitable company.
The ideal acquisition candidate combines convincing financial and market data with operational stability and growth potential. At the same time, the specific risks of the succession situation must be taken into account. The search process itself requires systematics, patience, and a broad network.
By consistently applying structured selection criteria and using modern tools such as the Viaductus Meta-Search, Search Fund operators can significantly increase their chances of success and identify the optimal acquisition candidate for their entrepreneurial future.
Would you like to learn how to determine the optimal timing for selling a company or how to calculate the value of a company? These topics are also crucial for the successful purchase or sale of a company.