I would like to share some quotes from all those interviews, which I have had with multiple (former/active) searchers in German-speaking markets. I hope, these quotes, which can be found in my currently published academic paper (Is business succession by the search fund model an option for Central Europe?, Freiling & Oestreich, 2022), will help you to understand the search fund model's application.
Five out of eight interview partners encountered situations which relate either to scepticism of the stakeholders towards them or were sceptics themselves. Young age and lack of experience were core hindrances.
- There was some uncertainty, because nobody knew who I was and why I am so young. ... They asked themselves if I am another corporate raider (A, ll###-###-#### ).
- Nobody would take us seriously, as we have never bought a company before and because we have no money to bring into the deal. They said that it could not work (C, l. 88).
- The sourcing depends on your credibility if you really have the money. This is difficult to indi- cate as a searcher. ... As an investor, I prefer not to pay for the search of the searcher. Because in such a case, I carry the risk of the searcher not finding a suitable target (E., ll###-###-#### ).
- It is not easy to sell a company to something as random as a search fund. ... The seller will tell you that ... your search fund is nothing else than a traditional private equity fund. ... The seller believes that ... you also just want to make a quick buck by flipping his business (F, ll###-###-#### ).
When it comes to the disadvantages, it addresses the lower equity share in the case of SFM and related issues of limited control and upside. In fact, half of the interviewees confirmed lower control because of a lower equity stake. They considered this lower control off-putting, as the paraphrases reveal.
- The disadvantage is your minority equity position in the SF. ... You report to the investors, not only yourself (A, ll###-###-#### ).
- With a search fund, you only own 25-30%; self-funded you own 100%, which frees you in your decisions (B, l. 475).
- Especially on the investor’s side, there are people, that must get involved in every detail and tell the searcher to check this and that (C, l. 710).
While not explicitly stated, the inconvenience effect of SFM is apparent. Besides that, interviewees stated a higher financial upside without the need to fulfill the financial expectations of investors, who otherwise would have an equity stake in the target company.
- You do not have to fulfill the investors’ growth and return expectations. ... This is a kind of free- dom (A, ll###-###-#### ).
- If you buy the company on your own with debt-financing, your personal upside is higher than with a search fund (B, l. 474).
However, six of eight interviewees pointed to competition-based hurdles as restriction of SFM adoption.
- In Germany, there are a lot of small-cap family offices, which are competing against you (B, II. 408).
- Because if somebody has a good business, he will be asked to sell it, not the other way round. ... But a typical searcher can also just call a PE fund and start as a manager and receive equity instead of salary. (E, l. 194 and 375).
Half of the interviewees mentioned the perception of higher flexibility in following unique opportunities, which does not comply with traditional target criteria of SFM like carve-outs, turnarounds, spin-offs, or start-up ideas.
- You have lower decisive power because you have to stick to the SF statutes (A, l. 306).
- We have asked the investors, but they said that we cannot do the deal in that way we and the sellers wanted. ... But sometimes you have to look for unusual solutions and make compro- mises. ... Normally, the traditional SF way would fail because some people have their own idi- osyncrasies (B, ll###-###-#### ).
For everyone who wants to have a look into the full results of my research, you can find the published academic paper for download free of charge here: https://eber.uek.krakow.pl/index.php/eber/article/view/1450