What is a search fund? Explanation, operation, and financing of search funds
More and more entrepreneurs and investors are encountering the concept of search fund business acquisitions in the SME sector. As M&A advisors, we also encounter this increasingly frequently in our daily practice. Yet, many people are still unclear about what a search fund is, how the model works, and why this form of entrepreneurship has been growing rapidly in the Netherlands in recent years.
In this article, we explain what a search fund is exactly, how the search fund model is structured, and discuss the key considerations when financing acquisitions through search funds.
What is a search fund?
A search fund is an investment model in which one or more entrepreneurs raise capital to find, acquire, and then run an existing SME.
The entrepreneur, also known as the searcher, initially raises capital from investors to start the search process. finance. Once a suitable company is found, additional financing is secured for the acquisition. After closing, the search firm becomes a director and shareholder.
The search fund model originated in the United States and has been a proven route to entrepreneurship there since the 1980s, especially for young entrepreneurs who want to become owners and managers at a young age.
Based on research by Stanford University and IESE, approximately 1,100 search funds have been established worldwide (as of 2023). Since 2021, the model has also been structurally active in the Netherlands.
Why is the search fund model gaining popularity in the Netherlands?
Search funds are gaining popularity because they align with Dutch SME practices on several points:
Business succession
: Search funds offer a solution for entrepreneurs seeking a successor who can not only take over financially, but is also personally committed to the continuity and further development of the company.
Unique market position
: By focusing on a single acquisition, search funds target established SMEs with stable cash flows, which are often too small for private equity and too mature for venture capital.
Clear niche
: Search funds thus fill a segment of the investment landscape that is traditionally underexposed, with access to stable companies and predictable cash flows.
Continuity for salespeople
: Compared to an individual MBI structure, a search fund often offers more peace of mind and security, because the successor is supported by a committed investor group with capital and experience.
Financial security
: The combination of a motivated entrepreneur and investor support strengthens the bankability of the transaction and increases the likelihood of sustainable continuation in the long term.
What is the difference between a search fund, MBI and private equity?
The comparison below shows how search funds position themselves compared to MBI candidates and private equity firms. It becomes clear that search funds occupy a unique position, with more available capital and support than an individual MBI, and a longer involvement than private equity.
Which companies are suitable for a search fund?
Search funds typically focus on established SMEs with stable cash flows. Typical characteristics of acquisition candidates are:
- Enterprise value in the SME segment.
- Proven business model.
- Predictable EBITA and cash flow.
- Too small for traditional private equity.
- Too mature for venture capital.
How does a search fund work? The four phases explained
The search fund model has a clear life cycle, consisting of four consecutive phases.
Phase 1: Collecting search capital
In this phase, the entrepreneur raises capital to finance the search process.
- Financing of salaries and search costs.
- Investors commit to the person.
- Often preferential rights in the final takeover.
- Duration: 1-6 months.
Phase 2: Search and Acquisition
The searcher actively looks for a suitable company.
- Selection of acquisition candidate.
- Presentation of the deal to investors.
- Raising acquisition financing.
- Start of the takeover process.
- Duration: 12-24 months.
Phase 3: Post-acquisition value creation
After the acquisition, the searcher becomes the company's director. The focus is on:
- Professionalization of processes.
- Strategic growth.
- Risk management.
- Strengthening management and structure.
- Duration: 4-7 years.
Phase 4: Exit
When entrepreneurs and investors want to realize their returns:
- Start the sales process.
- Are proceeds distributed based on the holdings?.
- Duration: 6 months.
How are acquisitions financed by search funds?
Acquisitions by search funds are typically financed with a combination of equity and debt. This structure works well because each financing option has a clear role and balances the interests of entrepreneurs, investors, and financiers.
Due to the central role of the entrepreneur and the often limited track record as a manager, this financing structure requires a careful and realistic approach.
In practice, financing usually consists of a combination of four components:
1. Bank financing
In most cases, bank financing forms the basis of the acquisition structure. Banks offer relatively favorable interest rates but impose clear requirements regarding cash flow, collateral, and the role of the entrepreneur. Because search funds are highly dependent on a single entrepreneur, banks carefully consider the searcher's profile and the quality of the investors behind the fund. A clear positioning and a realistic structure are essential.
Characteristic of bank financing for search funds:
- Typically around 2.0 to 2.5 times EBITDA.
- Strict covenants and reporting obligations.
- Strong focus on the person of the searcher.
2. Mezzanine financing
Mezzanine financing is used to supplement bank financing when additional capacity is needed. This financing option is more flexible than a bank loan, but has higher costs. In practice, mezzanine financing is primarily used for larger SME transactions or when a search fund wants to maintain growth capacity for future acquisitions.
Characteristic of mezzanine financing:
- In addition to bank financing.
- Less strict covenants.
- Higher interest rate than bank financing.
3. Seller's loan
A seller's loan is a commonly used financing method for search funds. In this process, the seller provides a subordinated loan to the buyer as part of the acquisition structure. Trust is highly valued by search funds, both for banks and investors.
Characteristic of a seller loan:
- Subordinated to bank financing.
- Strengthens overall bankability.
- Shows the seller's confidence in the entrepreneur.
4. Equity contribution
In addition to debt, the search fund also contributes its own equity. This equity contribution consists of capital jointly provided by the entrepreneur and the investors. This structure ensures a clear alignment of interests between the entrepreneur and the investors and forms an important foundation for the financing.
Characteristic of the equity contribution:
- Typically 25 to 30 percent of the enterprise value.
- Joint contribution of entrepreneurs and investors.
- Investors often participate through cumulative preferred shares.
Why is good guidance for search funds essential?
The financing process for an acquisition through a search fund requires extra attention and preparation. Due to the central role of the entrepreneur, the involvement of investors, and the combination of various financing options, the structure is often more complex than for a standard SME acquisition.
That's precisely why it's important to consider the financing feasibility of the transaction early on. This prevents surprises after an agreement has been reached with the seller and increases the likelihood of a smooth and manageable acquisition process.
An advisor with experience in search funds helps with structuring the financing, positioning it towards banks and debt funds and safeguarding the interests of all parties involved. Our financing specialists have extensive experience with acquisition financing across a wide range of sectors and have access to a broad network of banks and alternative financiers. This allows us to provide targeted and careful guidance to search funds in the acquisition of a company.
Why choose Match Plan?
Match Plan guides entrepreneurs, searchers, and investors through search funds from initial orientation through to closing. As independent advisors, we ensure a structured process that prioritizes interests, continuity, and financial viability. What we do for you:
- Full support for acquisitions and financing.
- Over 30 years of experience in SME business acquisitions.
- Strategic thinking about structure, valuation and negotiations.
- Independent and transparent advice.
- Coordination of the entire process.
Would you like to know what a search fund can do for your situation or how to finance an acquisition? Feel free to contact us for a no-obligation consultation.
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