Capital Raising and Investors for Search Funds: How to Finance the Search and Acquisition?

The financing of a Search Fund is a multi-stage process that fundamentally differs from other business acquisitions. This article explains the various financing phases, capital sources, and structural particularities involved in raising capital for Search Funds.

How is the capital requirement of a Search Fund structured?

The financing needs of a Search Fund are typically divided into two clearly separated phases with different risk profiles and capital requirements:

1. Search Capital

Search capital covers the costs of the identification and evaluation phase:

• Typical amount: €300,000 to €500,000
• Purpose:
  • Salary of the Searcher (usually 60-70% of the budget)
  • Travel expenses for company visits
  • Consulting fees (legal and tax advice)
  • Databases and research tools
  • Administrative expenses
• Duration: 18-30 months

2. Acquisition Capital

Acquisition capital is used for the actual purchase of the company:

• Typical amount: €2-15 million (depending on company size)
• Financing structure: Typically 30-50% equity, 50-70% debt
• Timing: Raised only after identifying a target company

Which types of investors are relevant for Search Funds?

Capital raising targets different investor groups with varying profiles:

Investors for the Search Phase

Typical investors in the search phase include:

• Experienced Search Fund investors: Specialists with a track record in this segment
• Family Offices: An important capital source, especially in the DACH region
• Business Angels: Often former entrepreneurs with industry experience
• Institutional seed investors: Specialized funds for the early phase
• Search Fund accelerators: Provide capital and structured support

These investors typically share the following characteristics:

• Willingness to bear risk during the search phase
• Interest in financing the mid-market
• Long-term investment horizon
• Often possess entrepreneurial experience themselves

Investors for the Acquisition Phase

For acquisition financing, additional investors often include:

• Banks and lending institutions: For the debt component
• Private equity funds: Especially for larger acquisitions
• Mezzanine capital providers: To close financing gaps
• Promotional credit institutions: Important capital providers in the DACH region (KfW, AWS, etc.)
• Search capital investors: Investors from the first phase usually have a preemptive right to participate

How does the capital raising process work?

1. Preparation and Investor Targeting

• Creation of the investor memorandum: Detailed presentation of the strategy, the Searcher, and their qualifications
• Identification of potential investors: Research and network utilization
• Creation of an investor pipeline: Prioritization based on interest and fit

2. Capital Raising for the Search Phase

• Investor meetings: Presentation of the search strategy and personal qualifications
• Due diligence by investors: Verification of qualifications and track record
• Contract negotiation: Determination of terms and investor rights
• Closing: Completion of the financing round and capital contribution

3. Capital Raising for the Acquisition

• Informing search capital investors: Detailed presentation of the acquisition target
• Preparation of the investment memorandum: Including company analysis and growth strategy
• Capital raising from existing investors: Exercise of preemptive rights
• Raising additional capital: From new investors if necessary
• Negotiation of the financing structure: Equity, debt, seller financing
• Closing: Signing and closing of the transaction

What are typical financing structures?

Structure of Search Financing

Common structures in search financing include:

• Investor base: Typically 10-20 investors with equal rights
• Investment amount per investor: €20,000-50,000 (in the traditional model)
• Legal structure: Usually GmbH or UG as the vehicle
• Use of funds reporting: Regular progress reports

Structure of Acquisition Financing

Typical components of acquisition financing are:

• Equity: 30-50% of total financing
• Senior debt: 30-50% (bank loans)
• Mezzanine/subordinated debt: 0-20% (subordinated loans)
• Seller loans: 0-30% (depending on negotiation)
• Earn-out components: Additional performance-based payments

The exact structure varies depending on:

• Size of the target company
• Industry and business model
• Risk profile
• Investor preferences

What does the ownership structure look like after the acquisition?

After a successful acquisition, the ownership structure typically looks like this:

Ownership distribution in traditional Search Funds

• Searcher: 20-30% of shares, usually as vesting shares
• Search capital investors: In addition to investment returns, a step-up (typically 1.5x)
• Acquisition capital investors: Proportional to invested capital

Vesting of the Searcher’s shares

The Searcher’s ownership stake is usually subject to vesting:

• Time-based vesting: Over 4-5 years
• Performance-based vesting: Upon reaching defined milestones
• Combinations of time- and performance-based components

What concrete financing sources exist in the DACH region?

Specific financing sources for Search Funds have established themselves in the German-speaking region:

Equity sources

• Specialized Search Fund investors: e.g., AlphaX Capital, German Search Funds
• Family offices: Particularly relevant for the mid-market
• Business angels: Via networks such as BAND or Business Angels Switzerland
• Mid-market focused investment companies: Increasingly open to Search Funds

Debt sources

• Promotional banks: KfW (Germany), AWS (Austria), SECO (Switzerland)
• House banks: Often regionally well acquainted with the mid-market
• Mezzanine specialists: Providers of subordinated loans and participation rights
• Specialized financing: Sale-and-lease-back, factoring, asset-based lending

Support programs for succession

• ERP funding: Low-interest loans for business acquisitions
• KfW Entrepreneur Loan: Standard program for acquisitions
• Guarantee banks: Securing bank loans through public guarantees
• Regional economic development: Additional support depending on location

What legal and tax aspects need to be considered?

When structuring capital, the following aspects must be taken into account:

Legal framework

• Investor agreements (SHA): Regulate rights and obligations of parties involved
• Vesting agreements: Legal protection of performance incentives
• Syndicate agreements: For larger investor groups
• Advisory board regulations: Structure and decision-making authority of the supervisory body

Tax optimization

• Holding structures: To optimize taxation
• Retained earnings privileges: Tax advantages for profit retention
• Taxation of management equity programs: Optimized design of the Searcher’s equity participation
• International tax law: For cross-border investors

How does capital raising differ between various Search Fund models?

Capital raising varies depending on the chosen Search Fund model:

Traditional Search Fund

• Broader investor base for the search phase
• Preemptive rights of search capital investors in acquisition financing
• Standardized step-up mechanisms for early investors

Self-funded Search Fund

• Search phase financed from the Searcher’s own funds
• Higher ownership stakes for the Searcher (typically 30-50%)
• More flexibility in selecting acquisition investors

Single-Sponsor Search Fund

• One main investor finances both search and acquisition phases
• Usually customized agreements instead of standard structures
• Often more direct influence of the investor on strategy development

Accelerator Model

• Structured program participation with standardized terms
• Often access to a network of accredited investors
• Support in capital raising for the acquisition

What are the most common challenges in capital raising?

Typical challenges in financing Search Funds include:

In the search phase

• Lack of awareness of the model: Need to explain to potential investors
• Dependence on the individual: Strong focus on the Searcher and their track record
• High failure probability: Not every search leads to an acquisition
• Long period without returns: Two to three years without capital appreciation

In the acquisition phase

• Valuation discrepancies: Different price expectations between investors and seller
• Financing gaps: Challenges in fully covering capital needs
• Timing issues: Short transaction windows versus lengthy capital raising
• Complexity with larger investor syndicates: Coordination of many parties

How should a successful investor memorandum be structured?

A convincing investor memorandum for a Search Fund should include the following elements:

For the search phase

1. Executive summary: Brief overview of the project and the Searcher’s qualifications
2. Personal profile: Detailed CV, achievements, references
3. Search strategy:
   • Target industries and their analysis
   • Geographic focus
   • Criteria for target companies
   • Deal flow generation strategy
4. Financial planning: Budget for the search phase with milestones
5. Offered terms: Investment structure, step-up, preemptive rights
6. Timeline: Realistic milestones for the search phase
7. Risk assessment: Open discussion of risks and challenges

For the acquisition phase

1. Company profile: Detailed presentation of the acquisition target
2. Market analysis: Positioning within the competitive environment
3. Due diligence results: Key findings from the review
4. Growth strategy: Concrete plans for development
5. Financial model: Historical figures and forecasts
6. Financing structure: Detailed presentation of capital sources
7. Risk management: Identified risks and countermeasures

What success factors are decisive in capital raising?

The following factors are crucial for successfully financing a Search Fund:

Personal factors of the Searcher

• Clear track record: Demonstrable successes and relevant experience
• Convincing personality: Leadership qualities and entrepreneurial mindset
• Network: Existing contacts with potential investors and sellers
• Professional expertise: Industry knowledge or transferable skills

Process-related factors

• Professional preparation: Well-thought-out documents and presentations
• Targeted communication: Understanding the investor perspective
• Time management: Parallel negotiations with multiple investors
• Transparent communication: Openness about risks and challenges

Structural factors

• Fair conditions: Balanced distribution of risks and opportunities
• Standardized documents: Use of market-standard contract structures
• Clear governance: Defined decision-making processes and control mechanisms
• Scalable structure: Ability to include different types of investors

Conclusion: Successful capital raising for Search Funds

Financing a Search Fund requires a structured approach and a deep understanding of the specific dynamics of this acquisition form. Through careful preparation, targeted investor outreach, and transparent communication, Searchers can significantly increase the likelihood of successful capital raising.

Capital raising should not be viewed as a one-time event but as a continuous process that extends from the initial contact with potential investors to the final acquisition structuring. Especially in the DACH region, where the Search Fund model is not yet as established as in the USA, a clear and convincing presentation of the concept and its benefits is crucial.

With the right strategy, a compelling profile, and a professional appearance, Searchers can raise the necessary capital for a successful business succession via Search Fund and lay the foundation for their entrepreneurial future.

Are you interested in more financing options for business acquisitions? Learn more about acquiring a business with little equity or alternative financing methods.