Search Funds: A smart solution for corporate succession

The succession issue in SMEs is not a new issue, but the urgency is growing. Many entrepreneurs are faced with the challenge of handing over their life's work — but the next generation is often missing. Get right here Search Funds into the game. This innovative concept connects ambitious entrepreneurs with established companies and at the same time offers exciting opportunities for investors.

In this post, you'll learn what search funds are, how they work and why they're so relevant right now.

What are search funds?

The concept of search funds was developed at Harvard Business School in the 1980s and has since gained popularity, particularly in the USA. It is still relatively new in Europe but is becoming increasingly important.

A search fund is basically an investment model in which an ambitious entrepreneur — the so-called “searcher” — collects capital from investors to buy and manage an existing company. Target companies are often small to medium-sized companies (Small Caps), which are facing a succession plan.

Why are search funds relevant?

The demographic development shows that more and more medium-sized companies in Germany are facing a succession problem. According to a study by the Institute for SME Research (IfM) Bonn, around 190,000 companies are looking for a successor by 2027.

Search funds offer a win-win situation here:

• For entrepreneurs: A succession solution that will continue the company in the long term.
• For investors: Access to established companies with growth potential.
• For Searcher: The opportunity to run a company without having to bring capital yourself.

An example: A screw manufacturer in Swabia whose founder wants to retire but has no successors in the family. A search fund could step in here, take over the company and modernize it through new management approaches.

How do search funds work?

The search fund process can be divided into four steps:

1. Raising capital
   The Searcher collects capital from investors, often from networks of business schools such as Harvard or Stanford. These networks not only provide financial support, but also access to experienced mentors who guide the searcher throughout the process.
2. Company search
   The aim is to find a company that is a good match for the searcher's skillset — often companies with stable sales and a clear succession issue.
3. takeover
   With the capital raised, the company is bought. The searcher takes over operational management, while the investors hold a minority stake.
4. Value increase and exit
   The aim is to further develop the company and generate a return for investors in the long term either through a management buyout or a sale to a strategic investor.

Difference between private equity and venture capital

Although search funds are often part of private equity considered, they differ in a few key points:

• Focus on succession planning: While classic private equity is often aimed at larger companies, search funds focus on small caps with succession problems.
• Lower risk than venture capital: In contrast to start-ups, which often do not yet have stable sales, search funds invest in established companies.
• More sympathetic perception: Search funds are often perceived as a “more people-friendly” alternative to traditional financial investors, as they do not have the typical “locust” image.

Opportunities and risks of search funds

Opportunities:

• Access to established companies with low risk compared to start-ups.
• Opportunity to act as an entrepreneur without contributing capital yourself.
• Attractive return opportunities for investors.

Risks:

• Success depends heavily on the skill of the searcher.
• Market conditions can make the exit difficult.
• Companies with a succession issue are not always optimally positioned.

Mentoring role and network

A key success factor for search funds is support from experienced advisory boards and networks. In the USA in particular, alumni networks from elite universities such as Harvard and Stanford play a central role. These mentors not only help searchers with corporate management, but also with strategic decisions and increasing value.

Conclusion: Search funds as a solution to succession issues

Search funds are an exciting model that offers new opportunities for both entrepreneurs and investors. Especially in Germany, where SMEs form the backbone of the economy, they could play an important role in solving succession issues.

If you want to dive deeper into the topic, listen to the Episode 46 of our podcast “Diversify — the private market podcast” on. There, we discuss in detail about search funds, how they work and why they are so relevant right now.

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