Boost Growth and Sustain Legacy: How Search Funds Strengthen the Future of SMEs
April 29, 2025
by an investor from IESE Business School in Calle de Núñez de Balboa, 120, 28006 Madrid, España
Arada Capital Partners has extensive experience in analyzing and investing in SMEs globally across a wide range of sectors. Over the past years, we have actively participated in the acquisition and transformation of SMEs, driving their growth and maximizing their value in a sustainable manner. Based on this experience, we would like to share our perspective on some of the key elements that Search Funds use to successfully lead these transitions.
The transformation process of a company acquired through a Search Fund typically unfolds in three fundamental stages. The first is an initial transition phase focused on gaining a deep understanding of the business, which usually lasts around one year. This is followed by a growth stage, where operational improvements are consolidated, and expansion is actively pursued. Finally, the exit preparation phase begins, generally starting around the fifth year. It is important to note that the exit does not necessarily mean a complete departure of investors. In many cases, only some investors choose to exit, while the management team—already experienced—remains with the company, ensuring its long-term continuity and development.
In this article, we would like to focus specifically on the first year following the acquisition—a critical period for ensuring a smooth transition. The primary goal during this stage should not be to introduce numerous changes but rather to learn the business from within and build a solid foundation that enables sustainable long-term growth alongside the new management team.
Although the order and exact content of the following points may vary depending on each company's specific characteristics, we believe all of them are essential to ensure a successful transition and to lay the groundwork for long-term growth:
• Building trust and relationships with the acquired company's employees: The first step to ensuring a smooth transition is building trust with the employees, which involves the challenging task of creating strong relationships that respect the existing organizational culture while gradually introducing new management practices. The key challenge lies in balancing continuity with evolution, ensuring that the workforce perceives the change as an improvement rather than a disruption.
o Recommended strategy: Hold regular meetings to share the project's vision and demonstrate commitment to maintaining what already works well. This strengthens the sense of belonging and minimizes the negative impact of leadership changes.
• Retaining key talent: One of the major concerns during any business transition is the potential loss of key employees who are critical to operational continuity. Implementing strategies to retain qualified personnel is crucial for maintaining business momentum.
o Strategy: Develop incentive programs and professional development opportunities to motivate employees to stay. While many shareholder agreements allow for equity packages for key employees, it is generally advisable to postpone the potential implementation of such tools until after gaining a deeper understanding of the business.
It is highly advisable to establish an effective talent search and selection process during the first year to cover future new positions or to replace key employees if necessary. Having a structured hiring process ensures operational continuity and strengthens the management team, especially during growth or restructuring phases.
• Defining roles and responsibilities: Leadership changes can create uncertainty if it is not clear who is responsible for key decisions—especially when the former owner remains involved. To avoid conflicts and ensure operational efficiency, it is essential to clearly define organizational structures, roles, competencies, and objectives.
o Strategy: Develop an updated organizational chart and communicate it clearly and transparently across all levels of the company. This ensures coordination between departments and avoids overlaps or gaps in responsibility. The seller’s involvement may vary depending on the specific context, but our experience suggests that adopting a more advisory-oriented role usually brings greater benefits to the new management team and minimizes potential future conflicts.
• Selecting and structuring the correct Board of Directors (BoD): The BoD plays a crucial role throughout the transformation process of an SME acquired through the Search Fund model. An effective BoD must perform several key actions:
o Continuous strategic support: The BoD should foster two-way communication with the management team, providing practical support and sharing experience without interfering in daily operations. To maximize its value, it is especially beneficial to structure a BoD whose members bring specialized knowledge in critical areas, focusing on key operational phase aspects such as operations, finance, M&A, KPI development, business development, digitalization, or international expansion. This diversity of perspectives allows challenges to be addressed comprehensively and strategic decision-making to be optimized.
o Setting KPIs to measure progress from the outset, aligning strategic objectives with operational performance. Establishing clear and effective KPIs for the short, medium, and long term, aimed at both operational efficiency and financial growth, is essential not only for the day-to-day management of the business but also for ensuring good BoD performance. This task should not fall solely on the management team; the BoD must actively participate in defining KPIs to ensure their strategic relevance and usefulness as a monitoring and decision-making tool.
o Building trust and strong relationships: The BoD must play a demanding and proactive role, ensuring that the company maintains a proper growth pace. To achieve this, it is essential that the BoD actively participates in defining the business plan and setting strategic goals alongside the management team.
The CEO, in turn, must feel continuously supported by the BoD, especially when the plan is not progressing as expected. It is essential to foster an environment of mutual trust, allowing both successes and challenges to be shared asap openly and encouraging the search for effective solutions collaboratively and aligned with the company’s interests.
o Creating effective boards: Governance structures must guide strategic growth without losing operational pragmatism. These plans do not have to be static over time; some companies may require more attention at certain times. However, it is highly recommended to set the dates for key events (submission of audited accounts, BoD meetings, Shareholders’ General Meeting, etc.) well in advance—we find it highly practical to schedule all these dates at the beginning of the year, ensuring availability and thorough preparation for each meeting.
o Long-term stability: The BoD's commitment must be oriented towards the long term, ensuring constant and professional involvement regardless of the company's phase. Board members’ dedication should not vary depending on short-term results or occasional circumstances. To ensure this stability, it is advisable to define the expected tenure of the members in advance, thus promoting consistency in management and continuity in strategic decision-making.
• Identifying quick wins: During the first months, it is important to identify improvement opportunities that can be implemented quickly, creating a visible positive impact. These "Quick Wins" help build trust with the team and former owners, demonstrating that the new approach can deliver immediate results.
o Strategy: Conduct rapid process analysis and select initiatives whose improvement will have a quick impact, strengthening the credibility of the new management team and generating initial positive momentum.
• Gaining deep business knowledge: It is essential for the new management team to conduct a thorough analysis of the company's operational and financial functioning. This comprehensive understanding allows for the early identification of improvement areas and informed decision-making. It is common for previously unidentified business aspects to emerge after the acquisition. The ability to adapt quickly and effectively to these new variables is critical to ensuring investment success and maintaining a strategic direction.
o Recommended strategy: Implement a deep immersion phase at different levels during the first few months to closely understand key processes, strengths, and weaknesses. Conduct internal audits, detailed financial analysis, and interviews with department heads.
----------------------------
Ultimately, the success of a transition following a Search Fund acquisition depends on a carefully planned integration phase, where respecting the existing culture, retaining key talent, building strong relationships, and ensuring effective governance are essential. At Arada Capital Partners, we believe that a clear strategy, disciplined execution, and an active Board of Directors are fundamental to driving sustainable growth and maximizing long-term value. When these elements align from the very beginning, the company’s potential to boost growth and sustain legacy is truly exceptional.
The transformation process of a company acquired through a Search Fund typically unfolds in three fundamental stages. The first is an initial transition phase focused on gaining a deep understanding of the business, which usually lasts around one year. This is followed by a growth stage, where operational improvements are consolidated, and expansion is actively pursued. Finally, the exit preparation phase begins, generally starting around the fifth year. It is important to note that the exit does not necessarily mean a complete departure of investors. In many cases, only some investors choose to exit, while the management team—already experienced—remains with the company, ensuring its long-term continuity and development.
In this article, we would like to focus specifically on the first year following the acquisition—a critical period for ensuring a smooth transition. The primary goal during this stage should not be to introduce numerous changes but rather to learn the business from within and build a solid foundation that enables sustainable long-term growth alongside the new management team.
Although the order and exact content of the following points may vary depending on each company's specific characteristics, we believe all of them are essential to ensure a successful transition and to lay the groundwork for long-term growth:
• Building trust and relationships with the acquired company's employees: The first step to ensuring a smooth transition is building trust with the employees, which involves the challenging task of creating strong relationships that respect the existing organizational culture while gradually introducing new management practices. The key challenge lies in balancing continuity with evolution, ensuring that the workforce perceives the change as an improvement rather than a disruption.
o Recommended strategy: Hold regular meetings to share the project's vision and demonstrate commitment to maintaining what already works well. This strengthens the sense of belonging and minimizes the negative impact of leadership changes.
• Retaining key talent: One of the major concerns during any business transition is the potential loss of key employees who are critical to operational continuity. Implementing strategies to retain qualified personnel is crucial for maintaining business momentum.
o Strategy: Develop incentive programs and professional development opportunities to motivate employees to stay. While many shareholder agreements allow for equity packages for key employees, it is generally advisable to postpone the potential implementation of such tools until after gaining a deeper understanding of the business.
It is highly advisable to establish an effective talent search and selection process during the first year to cover future new positions or to replace key employees if necessary. Having a structured hiring process ensures operational continuity and strengthens the management team, especially during growth or restructuring phases.
• Defining roles and responsibilities: Leadership changes can create uncertainty if it is not clear who is responsible for key decisions—especially when the former owner remains involved. To avoid conflicts and ensure operational efficiency, it is essential to clearly define organizational structures, roles, competencies, and objectives.
o Strategy: Develop an updated organizational chart and communicate it clearly and transparently across all levels of the company. This ensures coordination between departments and avoids overlaps or gaps in responsibility. The seller’s involvement may vary depending on the specific context, but our experience suggests that adopting a more advisory-oriented role usually brings greater benefits to the new management team and minimizes potential future conflicts.
• Selecting and structuring the correct Board of Directors (BoD): The BoD plays a crucial role throughout the transformation process of an SME acquired through the Search Fund model. An effective BoD must perform several key actions:
o Continuous strategic support: The BoD should foster two-way communication with the management team, providing practical support and sharing experience without interfering in daily operations. To maximize its value, it is especially beneficial to structure a BoD whose members bring specialized knowledge in critical areas, focusing on key operational phase aspects such as operations, finance, M&A, KPI development, business development, digitalization, or international expansion. This diversity of perspectives allows challenges to be addressed comprehensively and strategic decision-making to be optimized.
o Setting KPIs to measure progress from the outset, aligning strategic objectives with operational performance. Establishing clear and effective KPIs for the short, medium, and long term, aimed at both operational efficiency and financial growth, is essential not only for the day-to-day management of the business but also for ensuring good BoD performance. This task should not fall solely on the management team; the BoD must actively participate in defining KPIs to ensure their strategic relevance and usefulness as a monitoring and decision-making tool.
o Building trust and strong relationships: The BoD must play a demanding and proactive role, ensuring that the company maintains a proper growth pace. To achieve this, it is essential that the BoD actively participates in defining the business plan and setting strategic goals alongside the management team.
The CEO, in turn, must feel continuously supported by the BoD, especially when the plan is not progressing as expected. It is essential to foster an environment of mutual trust, allowing both successes and challenges to be shared asap openly and encouraging the search for effective solutions collaboratively and aligned with the company’s interests.
o Creating effective boards: Governance structures must guide strategic growth without losing operational pragmatism. These plans do not have to be static over time; some companies may require more attention at certain times. However, it is highly recommended to set the dates for key events (submission of audited accounts, BoD meetings, Shareholders’ General Meeting, etc.) well in advance—we find it highly practical to schedule all these dates at the beginning of the year, ensuring availability and thorough preparation for each meeting.
o Long-term stability: The BoD's commitment must be oriented towards the long term, ensuring constant and professional involvement regardless of the company's phase. Board members’ dedication should not vary depending on short-term results or occasional circumstances. To ensure this stability, it is advisable to define the expected tenure of the members in advance, thus promoting consistency in management and continuity in strategic decision-making.
• Identifying quick wins: During the first months, it is important to identify improvement opportunities that can be implemented quickly, creating a visible positive impact. These "Quick Wins" help build trust with the team and former owners, demonstrating that the new approach can deliver immediate results.
o Strategy: Conduct rapid process analysis and select initiatives whose improvement will have a quick impact, strengthening the credibility of the new management team and generating initial positive momentum.
• Gaining deep business knowledge: It is essential for the new management team to conduct a thorough analysis of the company's operational and financial functioning. This comprehensive understanding allows for the early identification of improvement areas and informed decision-making. It is common for previously unidentified business aspects to emerge after the acquisition. The ability to adapt quickly and effectively to these new variables is critical to ensuring investment success and maintaining a strategic direction.
o Recommended strategy: Implement a deep immersion phase at different levels during the first few months to closely understand key processes, strengths, and weaknesses. Conduct internal audits, detailed financial analysis, and interviews with department heads.
----------------------------
Ultimately, the success of a transition following a Search Fund acquisition depends on a carefully planned integration phase, where respecting the existing culture, retaining key talent, building strong relationships, and ensuring effective governance are essential. At Arada Capital Partners, we believe that a clear strategy, disciplined execution, and an active Board of Directors are fundamental to driving sustainable growth and maximizing long-term value. When these elements align from the very beginning, the company’s potential to boost growth and sustain legacy is truly exceptional.