“ISKALNI SKLAD” KOT VSE ATRAKTIVNEJŠA IZBIRA PODJETNIKOV IN INVESTITORJEV

About the Opportunity

Are you a successful individual looking to take over and actively manage a company with the support of co-investors? Are you an investor seeking more profitable investment opportunities? Are you an SME owner struggling to find the right buyer for your business? If you answered "yes" to any of these questions, search funds may be the solution for you.

A search fund is an investment vehicle that allows one or more successful entrepreneurs to raise capital from investors to finance the search for and acquisition of a target company, where they assume a leadership role. This model, often referred to as "acquisition entrepreneurship," has grown increasingly popular in recent years.

Search funds typically involve multiple parties: searchers (usually 1-2 individuals) who are often young, ambitious, and intelligent with relevant experience, and investors (usually 4-20 individuals or entities) such as affluent individuals, families, or financial funds that include such investments in their strategy.

A key characteristic of search funds is their willingness to view common business shortcomings—such as dependency on key personnel, non-standardized processes, unclear organizational structures, underdeveloped unique selling propositions, or seasonal business cycles—as opportunities for improvement after taking over active management. Companies with these challenges are often less attractive to other investors, making their sale a significant hurdle.

How Search Funds Operate

Search funds typically divide their operations into two phases:

• Preparation Phase (1-2 years): Developing the search fund strategy, securing preliminary financing, identifying and evaluating acquisition targets, negotiating with current owners, raising acquisition capital, and closing the transaction.
• Management Phase (3-7 years): Leading the acquired company and realizing the planned value creation. The searcher takes an active management role, while co-investors provide support and guidance.

The external environment has increasingly supported the search fund model in recent years. Developed countries recognize the serious challenge of transferring ownership in SMEs and the associated inefficiencies. Leading universities (e.g., Harvard, Stanford, Oxford, INSEAD) now offer programs within MBA studies to prepare top talent for these challenges. Specialized financial products, such as SBA loans in the U.S., are also emerging for search funds. Networking events, success stories, and community-building activities are on the rise.

Value Creation

The acquired company serves as a platform for achieving targeted returns. Value creation focuses on maximizing cash flow and minimizing risks. A simplified example of valuation at entry and exit:

• Entry: 5x EV/EBITDA multiple × €1,000,000 EBITDA = €5,000,000 Enterprise Value (EV)
• Exit: 7x EV/EBITDA multiple × €2,000,000 EBITDA = €14,000,000 EV

Creating value between entry and exit does not require complex valuation methods. Many value-adding activities are outlined in our article on business valuation and increasing value.

Motivation and Challenges

The primary motivation for participating in a search fund is achieving above-average returns. According to a Harvard University study, these average around 35% annually. The principal-agent problem is rare, as the searcher’s interests align closely with those of investors. In addition to a relatively high salary, the searcher receives a capital reward (up to 30% equity in the acquired company), motivating daily leadership.

However, search funds face numerous challenges, including aligning the expectations and interests of multiple stakeholders. Key questions include:

• What is the ideal profile for a searcher, and how to address their shortcomings?
• Which co-investors to invite?
• How to communicate the business opportunity?
• What key documentation is needed, and how to structure it?
• How to identify the right acquisition opportunities?
• How to design the financial structure and test business development scenarios?

It’s important to note that while returns are high on average, not all search funds meet expectations. Stanford University statistics indicate:

• ~30% of search funds take longer than two years to find a target.
• ~20% end without an acquisition.
• ~8% realize negative returns.

In unsuccessful cases, the primary issue is often an inadequately designed financial structure. A balanced approach is critical—higher financial leverage can yield higher returns but also increases risk. A deeper understanding can be gained by preparing business scenarios under various assumptions.

Next Steps

Search funds can be a compelling business opportunity, as evidenced by the exponential growth in completed transactions. For searchers and investors, we offer in-depth and comprehensive support. Contact us to explore collaboration opportunities.