The transformation of an SME acquired through a search fund runs in three phases. This is our view on the first — the year in which the goal is not to change the business but to understand it.
Arada Capital Partners has extensive experience analysing and investing in SMEs across a wide range of sectors. Over the past years we have participated in the acquisition and transformation of these businesses, and this piece sets out our perspective on the elements that determine whether those transitions succeed.
The transformation process typically unfolds in three stages. The first is a transition phase focused on gaining a deep understanding of the business, usually lasting around a year. This is followed by a growth stage, where operational improvements are consolidated and expansion is pursued. Finally the exit preparation phase begins, generally around year five. It is worth noting that exit does not necessarily mean a complete departure of investors: in many cases only some exit, while the management team — by then experienced — remains.
Here we focus on the first year, a critical period for ensuring a smooth transition. The goal during this stage should not be to introduce numerous changes but to learn the business from within and build a foundation for sustainable growth alongside the new management team.
Building trust with the acquired company's employees
The first step is building trust with employees, which means creating strong relationships that respect the existing culture while gradually introducing new management practices. The challenge is balancing continuity with evolution, so that the workforce perceives the change as an improvement rather than a disruption.
Recommended approach: hold regular meetings to share the vision and demonstrate commitment to maintaining what already works well. This strengthens belonging and minimises the negative impact of a leadership change.
Retaining key talent
One of the major concerns during any transition is the loss of employees critical to operational continuity.
Recommended approach: develop incentive programmes and development opportunities. While many shareholder agreements allow equity packages for key employees, it is generally advisable to postpone implementing such tools until after gaining a deeper understanding of the business. It is also worth establishing an effective recruitment process during the first year, to cover new positions or replace key employees if necessary.
Defining roles and responsibilities
Leadership changes create uncertainty if it is not clear who is responsible for key decisions — especially when the former owner remains involved. Clearly defining structures, roles, competencies and objectives avoids conflict.
Recommended approach: develop an updated organisational chart and communicate it transparently at all levels. The seller's involvement may vary by context, but our experience suggests an advisory-oriented role usually brings greater benefit to the new management team and minimises future conflict.
Selecting and structuring the board
The board plays a crucial role throughout the transformation of an SME acquired through the search fund model. An effective board must:
- Provide continuous strategic support. Two-way communication with management, practical support and shared experience without interfering in daily operations. It is especially valuable to structure a board whose members bring specialised knowledge in critical areas — operations, finance, M&A, KPI development, business development, digitalisation or international expansion.
- Set KPIs to measure progress from the outset, aligning strategic objectives with operational performance. This should not fall solely on management; the board must participate in defining KPIs to ensure their strategic relevance.
- Build trust. The board must be demanding and proactive while ensuring the CEO feels supported, particularly when the plan is not progressing as expected. Both successes and problems should surface early.
- Create effective governance that guides strategic growth without losing operational pragmatism. We find it highly practical to schedule all key dates — audited accounts, board meetings, general meeting — at the start of the year.
- Commit for the long term. Board members' dedication should not vary with short-term results. Defining expected tenure in advance promotes consistency.
Identifying quick wins
During the first months it is important to identify improvements that can be implemented quickly, creating a visible positive impact. These build trust with the team and the former owners, demonstrating that the new approach delivers.
Gaining deep business knowledge
The new management team must conduct a thorough analysis of how the company works operationally and financially. It is common for previously unidentified aspects of the business to emerge after the acquisition, and the ability to adapt quickly to these is critical.
Recommended approach: a deep immersion phase across different levels during the first months — internal audits, detailed financial analysis and interviews with department heads.
In summary
The success of a transition depends on a carefully planned integration phase, where respecting the existing culture, retaining key talent, building relationships and ensuring effective governance are essential. A clear strategy, disciplined execution and an active board are fundamental to driving sustainable growth. When these elements align from the beginning, the company's potential to boost growth and sustain legacy is exceptional.