Rather than building from zero, a searcher continues what already works. An argument for why acquiring beats founding in an environment of rising rates.
A search fund is an investment vehicle created by one or two entrepreneurs with the objective of raising capital from several investors to finance the search for an SME, in order to acquire, manage and grow it.
Instead of creating a company from scratch, the entrepreneurs seek to continue the cornerstones of the acquired company's success. They build on the legacy of the founder with the help and advice of their investors, seeking to realise a new phase of growth for the business.
The typical target is an SME with EBITDA of between €1m and €3m: solvent companies with a good financial structure and a history of profitability and growth whose owners, for succession or other reasons, want to sell. These companies tend to sit below the natural targets of private equity funds and above those of venture capital. Search funds are therefore an alternative for owners who want to sell, and an option for entrepreneurs who want to acquire and manage companies with growth potential.
Although the model was born in the United States more than thirty-five years ago, we are seeing a proliferation of this form of entrepreneurship around the world, which has led to the emergence of specialised institutional investors such as Arada Capital Partners — firms that first finance the search and then invest alongside the searcher in the company acquired.
One of the keys to this model is the alignment between investors and entrepreneurs, and its collaborative nature. The entrepreneur is supported by investors not only in the search for the business but during the management of the company once acquired.
In the current climate there are particular advantages to acquiring an existing company. The businesses acquired tend to be more resistant to sudden economic movements than newly created ones. And in an environment of rising interest rates, their track record and established position mean they generally obtain more favourable financing conditions.
The search fund model is here to stay. It provides a solution to the problem of generational handover facing a multitude of companies, while supporting experienced entrepreneurs who want to run one.