2022, Vol. 10, No. 2 10.15678/EBER.2022.100205
Is business succession by the search fund model
an option for Central Europe?
Jörg Freiling, Max Oestreich
A B S T R A C T
Objective: Introduced in the 1980s in the USA, the search fund model as a niche financial instrument of en-
trepreneurship through acquisition has not yet become popular outside North America. This article responds
to the question whether search fund could be an interesting model for Central European countries with an
increase in business successions.
Research Design & Methods: A qualitative content analysis of interview data from eight cases from German-
speaking countries allows analysing the context and experiences, as this is the region with the most cases of
applications within Central Europe to date.
Findings: The results reveal the entrepreneurial intent of the searchers, the searcher’s confirmation of the
theoretical advantages of the search fund model, and the low popularity of the model in the German-speaking
markets due to scepticism and hindering factors like the criteria catalogue, market idiosyncrasies, competition
of private market investors, and lower control of choosing and running a target company. Furthermore, these
markets offer well-established financing alternatives which makes searchers choose alternative models.
Implications & Recommendations: Because the search fund model as niche model does not tap its full poten-
tial, a transfer of best practices between different regions in the world is beneficial. Moreover, platforms con-
necting successors, funders, and predecessors may be useful in this regard.
Contribution & Value Added: The study offers first empirical insights on adoption factors of the search fund
model in German-speaking markets: in so doing, it sheds light on preferences and concerns of the parties
involved, with the aim to facilitate the model’s future application all-over Central Europe.
Article type: research article
Keywords: business succession; search fund model; entrepreneurship through acquisition; manage-
ment buy-in
JEL codes: G34, G41, L26
Received: 10 July 2021 Revised: 7 January 2022 Accepted: 8 January 2022
Suggested citation:
Fr eili ng, J., & Oe s trei ch, M. (202 2 ). I s Busi n ess S ucce s sio n by th e Sea r ch Fu n d Mod el an O ptio n
for Central Europe?. Entrepreneurial Business and Economics Review, 10(2), 81-96.
https://doi.org/10.15678/EBER.2022.100205
INTRODUCTION
Business successions are disruptions for the companies involved and often imply significant changes.
New people and organizations come into play and allow new constellations of ownership, leadership,
finance, and governance. Entrepreneurial revitalizations may come to the fore particularly in the case
of external successions (Freiling & Poeschl, 2020).
Already in 1984, the search fund model (SFM) was developed (Johnson, 2014; Kelly & Heston,
2020). Tracing back to Grousbeck, a professor at Stanford University, the model lets fresh, but not
liquid MBA graduates (‘searchers’) run a company as an entrepreneur, backed up by investors financ-
ing the acquisition (‘funders’), while paving the way for predecessors to exit. While there is a bigger
number of US SFM applications with 258 funds (Järvinen, 2019), research is rather silent on SFM. Cur-
rent research on this topic addresses the unchanged model from 1984 in the original USA context
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(Dennis & Laseca, 2016). Yoder et al. (2018) define SFM as a financial instrument which is brought to
life by one or two aspiring entrepreneurs, who collect equity from investors. With this commitment,
investors also take on a consulting role as board members which is critical to the success of search
funds (SF) (Dennis & Laseca, 2016). Moreover, the investors will be first in-line to bring in further equity
needed for the acquisition in the sense of a leveraged buy-out with the help of debt financing by a
corporate bank. The searchers take on their new roles as the CEOs of the acquired business following
the steps of a management buy-in. They create value for the investors by optimizing operation pro-
cesses, increasing cashflow and, therefore, deliver a significant return on equity (Yoder et al., 2018).
As succession problems are increasing, particularly in the German-speaking countries, small busi-
nesses and family firms are looking for useful succession options with more emphasis on external suc-
cessions (Schwartz, 2018; Freiling & Poeschl, 2020) due to decomposing family structures in the soci-
ety. This may favour the SFM. However, the numbers of active search funds (SF) in Germany, Austria,
and Switzerland show a different picture: the SFM does not seem to have gained popularity in Central
Europe. In 2018, Kolarova et al. (2018) could identify only 83 search funds outside the USA – with only
four successful acquisitions in Germany between 2010 and 2016, while Austria and Switzerland
counted only one formed search fund each but no acquisition in the same period. The 2020 IESE Search
Fund Study already identified 132 first-time international search funds raised from before 2012 until
the end of 2019 – with 50 of them raised in 2018 and 2019. Europe makes up only 24 of the recently
formed search funds, with German-speaking countries counting only 10 formed search funds since
2010 and Poland counting only two (Kolarova et al., 2020).
Comparing the number of successful applications of the SFM in various international markets to
the numbers of North America, especially Germany-speaking countries lack behind. However, taking
into account the development of the model’s application in the US, the model needed almost 20 years
from its first applications to get enough traction (Dennis & Laseca, 2016).
On this note and from an entrepreneurs’ angle, this article addresses the following research ques-
tion: „How and why does the SFM facilitate acquiring businesses in German-speaking countries to as-
piring entrepreneurs? “Based on qualitative empirical research on the small number of cases in Ger-
many, Austria and Switzerland, the article advances research by context-specific insights and particular
adoption factors of the SFM. The results contribute to the understanding of this niche financial instru-
ment for business succession all-over Central Europe.
After the conceptual foundations in the next section, we describe the development of research prop-
ositions and the methodology. Next, we present the findings and close with a discussion and conclusions.
LITERATURE REVIEW AND PROPOSITION DEVELOPMENT
Literature review and foundations
The SFM is one option among the various models of entrepreneurship through acquisition (ETA) (Fund
& Hunt, 2012). Rather than founding a new business, ETA is ‘the acquisition of an existing small or
medium-sized business by an entrepreneur for the purpose of expanding and enhancing the business
through transformational strategies that fundamentally reshape market processes’ (Fund & Hunt,
2012, p. 31). This definition sees the entrepreneur in a pivotal position which animates this study to
focus accordingly, as the entrepreneur predominantly provides the sense of direction for the company
after succession. Transformational strategies, entrepreneurial mechanisms, and applied business in-
novation are key to ETA and its niche of the SFM, in which underperforming, undervalued business
assets in low-/no-growth industries motivate the actors to capture value (Fund & Hunt, 2012). The
concept of ETA uses an ‘owner as agent’ governance structure and creates value through using long-
term growth and expansion into new products, services, and markets. The cash flow is deployed to
growth initiatives in an operationally or strategically undermanaged target company.
There are different models of practicing ETA, namely: self-funded search, crowdfunded search, the
single investor-based captive model, the accelerator approach and the SFM (Dennis & Laseca, 2016;
Yoder et al., 2018; Kelly & Heston, 2020). Figure 1 provides an overview of the different profile ele-
ments of each of the models and allows a first view on the ‘anatomy’ of the SFM. Yoder et al. (2018)
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emphasize that the different approaches to ETA have their specific (dis-)advantages in terms of flexi-
bility, risk, deal size, and economics for the searching future entrepreneur, all mirrored in the two
arrows of Figure 1 as explained below.
Figure 1. ETA Models in Comparison
Source: Own elaboration based on Yoder et al. (2018) and Dennis & Laseca (2016).
The SFM is a small but growing and highly under-researched niche of ETA and an effective exem-
plary of how ETA can work. Aspiring entrepreneurs ‘raise capital for the sole intent of identifying and
acquiring undermanaged businesses that grow in value through an infusion of entrepreneurial stra-
tegic intent’ (Fund & Hunt, 2012, p. 37). It is part of the specific profile of the search fund investment
vehicle that allows an aspiring entrepreneur to search for, acquire, manage, and grow a company
backed up by the financial support of investors (Stanford Business School, 2013). Figure 1 suggests
that the SFM may provide access to considerable amounts of financial capital, slack resources and
support on high expertise levels. Li and Grousbeck (2003) introduced this concept in the upcoming
era of globalization, liberalisation, and tax laws in the mid-1980s. Raising equity from investors to
leverage with debt financing for being able to acquire a company, is among the core ambitions of the
SFM (Yoder et al., 2018; Kelly & Heston, 2020). This goes along with limiting the searchers’ flexibility
and the financial upside thanks to the guidance by accompanying investors. Literature suggests that
the higher the support for searchers by investors through network and capital, the lower the flexibility
for the searcher (Yoder et al., 2018; Kelly & Heston, 2020; Stanford Business School, 2013). The SFM
distinguishes itself from other models of searching for an acquisition target by raising ‘search capital’
from investors first to finance a diligent search for a target company, and then, in a second step,
raising ‘acquisition capital’ from those investors for the acquisition itself (Stanford Business School,
2013). Given a potential succession wave in the future with considerable corporate values, the exper-
tise of investors may be an asset that could bring SFM into a favourable position.
From an overall perspective, the typical SF process comprises four different stages: raising initial
capital, identifying and making an acquisition, operation and value creation, and exit. The different
stages are defined by different goals and strategies to be fulfilled consecutively for being able to enter
the next stage and create value for all involved stakeholders (Johnson 2014; Hines & Morrissette, 2015;
Dennis & Laseca, 2016; Ruback & Yudkoff, 2017; Kelly & Heston, 2020). Typically, this vesting schedule
vests one-third upon deal closing, one third over-time, and one-third upon hitting defined performance
targets (Yoder et al., 2018; Kelly & Heston, 2020; Pohlmeyer & Rosenthal, 2016).
To a large extent, the particular profile of the SFM rests on the trilateral constellation of actors:
the (often young) entrepreneurs, the investors, and the predecessors’ company. Literature deals with
the horse race metaphor according to Figure 2. The analogy of the ‘jockey, the trainer and the horse’
(Johnson, 2014, p. 5; Dennis & Laseca, 2016, p. 16) tries to suggest a triple-win perspective.
Accelerator Model
Search Fund Model
Captive Model
Crowdfunded Model
Self-funded Model
Increasing Capital Slack
and Support
Increasing Flexibility and
potential Upside
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Figure 2. SFM’s Trilateral Constellation
Source: own elaboration based on Johnson (2014).
Entrepreneurs’ angle (‘jockey’)
According to literature, in 84% of all cases, the SF entrepreneur is a graduate from an MBA pro-
gramme (Pohlmeyer & Rosenthal, 2016; Dennis & Laseca, 2016; Kelly & Heston, 2020). Searchers
have very diverse professional backgrounds, predominantly from management consulting, invest-
ment banking or finance, private equity, general management, and engineering (Kelly & Heston,
2020; Kolarova et al., 2020). Pohlmeyer and Rosenthal (2016) point out that following the path of an
SF entrepreneur implies high opportunity costs in the face of attractive careers in management con-
sulting, investment banking, finance, or private equity, which the entrepreneurs skip (Wasserman,
2013). Therefore, on top of the ‘desire to own, manage, and build a company’ (Stanford Business
School, 2013) and the wish for realizing a high financial upside and higher risk aversion in comparison
to founding a start-up (Ruback & Yudkoff, 2017), searchers need certain skills to succeed in ETA.
Basic management and accounting skills, confidence and communication skills towards investors,
business brokers and sellers, and employees and customers, are among the needed skills and traits.
Furthermore, they need optimism, enthusiasm, and resilience as in every search stage they will en-
counter hurdles (Ruback & Yudkoff, 2017).
The SFM promises searchers a low-risk and high-reward way to entrepreneurship. Looking at the
2020 study from IESE Business School on international SF outside the USA and Canada, the median
equity value for current business operators (former searchers) is 1.07 mln USD and 0.54 mln USD per
year of operation. This is due to SF entrepreneurs taking a 15-30% equity stake in the acquired com-
pany according to the vesting schedule which capitalizes upon exit (Stanford Business School, 2013).
Generally, searchers have an intrinsic entrepreneurial motivation to choose ETA over a different pro-
fessional career. Furthermore, they are looking for a less risky way into entrepreneurship than creating
a new venture with a more streamlined financial upside.
Investors’ angle (‘trainer’)
When looking at the risk profile of SF as an asset class compared to other private market investment
options, SF provide a higher aggregated internal rate of return and less survival, exit and liquidity risks
(Fund & Hunt, 2012). In comparison to start-up companies backed by angel investments or venture cap-
ital, which display a 35% survival rate, search funds’ survival rates range at a 90% level (Fund & Hunt,
2012). Private equity buyout firms operate similarly to SF, but traditionally acquire target companies with
Jockey
= the search funds
entrepreneur becoming
CEO of their own business
Horse
= the target company
finding a successor and
creating value
Trainer
= the investor and searchers’
mentor making gains on low-
risk investment opportunities
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a higher EBITDA, as SF in the US focus on targets with EBITDA below five mln USD (Johnson, 2014). Com-
pared to traditional private equity buyout funds, SF have provided a better overall performance (Global
Private Equity Report, 2020). Overall, for investors, SF are a less risky investment opportunity within the
private markets than traditional private equity, angel investing or venture capital. Furthermore, in this
comparison, SF have realized higher returns of investment and higher internal rates of return (Kelly &
Heston, 2020; Kolarova et al., 2020; Fund & Hunt, 2012; Global Private Equity Report, 2020).
Target companies’ angle (‘horse’)
Kolarova et al. (2020) report that the median international SF acquisition ranges at a purchase price
of 11 mln USD, providing a revenue of eight mln USD with an EBITDA margin of 23% and acquired at
a purchase price to EBITDA multiple of 5.6 times with a purchase price to sales multiple of 1.3x (Kelly
& Heston, 2020, for US and Canadian key figures). According to the most recent SF studies, compa-
nies out of the sectors services, software and healthcare providers, and healthcare services make up
for the biggest part of successful acquisitions (Kelly & Heston, 2020). Notably, companies fulfilling
traditional requirements of being asset-light, in a growing market, having mostly recurring or re-
peated revenue, low capital expenditure, and a high EBITDA margin (Ruback & Yudkoff, 2017; John-
son 2014; Kolarova et al., 2020; Li & Grousbeck, 2003), like services, software and technology-ena-
bled services have been on the decline, whereas education, manufacturing, and construction ser-
vices have been starting to become interesting for SF (Kelly & Heston, 2020). Traditionally, manufac-
turing was unattractive to investors because of higher complexity and higher capital expenditures,
which increases the risk in the case of management mistakes and market volatility. Similarly, inves-
tors did not provide capital for healthcare deals due to heavy regulation within this industry. How-
ever, with a rising number of deals from these industries pitched to investors, more deals are eval-
uated and realized on a case-by-case basis (Dennis & Laseca, 2016). Following Johnson (2014), an
explanation for this trend can be that in the past many deals with very good returns have deviated
from the strict SF criteria. This led investors to support more and more deals that do not fulfil all the
traditional criteria (Johnson, 2014). Despite the development according to which ‘business services
cannot continue to be the only source of companies in search funds’ (Dennis & Laseca, 2016, p. 16),
the core criteria of the traditional SFM should not be altered, because they have made it an attrac-
tive asset class in the first place (Dennis & Laseca, 2016).
In German-speaking markets, succession problems are constantly increasing. In Germany, until
2022 over 842 000 business owners of mid-sized business will have retired, and another 275 000
small businesses are expected to start evaluating succession options (Schwartz, 2018). In Austria,
within the upcoming years almost 90,000 companies have to deal with business succession
(Wirtschaftskammer Tirol, 2017). As most of these businesses with succession problems are run by
single proprietors, they often do not comply with the usual search criteria and are, thus, not among
the targets for aspiring entrepreneurs utilizing the traditional SFM. Considering only the limited lia-
bility companies, limited liability partnerships and private liability companies, this leaves an indica-
tory pool of over 12 000 businesses. Concerning Switzerland, over 91,360 companies are facing the
same problem, with 494 companies employing more than 50 people (KMU Nachfolge Schweiz, 2021)
and are, thus, more likely to fit the SFM criteria.
Looking at these numbers, the prognosis of Hines and Morrissette (2015) that the SFM is likely to
benefit from the rising opportunities for acquiring small businesses within the next years seems to be
applicable for Central Europe and, particularly, the German-speaking markets, too. It is also evident
that SFM provides sound replies to the upcoming problems in case of successions. This article targets
the respective context, aims particularly at a critical assessment of SFM’s practicality in the German-
speaking markets and fills the research gap of understanding the factors allowing an adoption of the
SFM by providing empirical evidence. The empirical fieldwork is framed by a set of research proposi-
tions to be developed below and guided by the following research question: how and why does the
SFM work for aspiring entrepreneurs to acquire businesses in German-speaking markets?
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Propositions
The conceptual foundations and prior research inform this study with first insights in the light of the
research question. The following considerations seek to condense prior knowledge and to develop
research propositions that undergo a first reality check by data from the field.
The first consideration is about the awareness of the SFM. It is evident that in the US, many
actors around the ‘horse race triad’ are rather familiar with the SFM (Ruback & Yudkoff, 2017; John-
son 2014; Kolarova et al., 2020; Li & Grousbeck, 2003). Johnson (2014) states, that even though
European SF are benefitting from experiences, factors and criteria set for and by the traditional SFM,
some cultures might be better suited for SF, because of not having a strong tradition of handing
down businesses within the family as is a usual case in Europe (Julia et al., 2010). Therefore, actors
in certain cultures are more willing to back an external, young, less-experienced person. One can
expect that entrepreneurs, investors, and predecessors in the German-speaking countries are simply
not aware of and not familiar with the SFM. Thus, we propose:
Proposition 1: The lacking awareness of the SFM in the actors’ minds and the still strong commitment
to family-internal successions hinder SFM adoption in the German-speaking markets.
Particularly graduates and professionals may have chosen not to pursue the path of entrepreneur-
ship due to perceived downside risk or limited profit. However, according to recent data, the SFM
offers a way to exploit entrepreneurial opportunities with comparably low failure and exit risk (Fund
& Hunt, 2012; Kelly & Heston, 2020; Kolarova et al., 2020), mainly due to the guidance of experienced
investors involved in the transaction (Dennis & Laseca, 2016). On top of reduced risk, the SFM may
offer higher expected returns than different professional careers. These findings lead to the question
whether the financial upside hand in hand with low risk may really outweigh the loss of equity and
control in the target company for searchers in the German-speaking markets. Hence, we propose:
Proposition 2: Searchers from German-speaking countries favour the SFM structure and guidance to
create financial upside with low risk.
Proposition 3: Searchers from German-speaking countries decide against the SFM because of a com-
parably lower equity stake and lower control.
The extensive list of prerequisites to decide whether to take an acquisition opportunity or not,
ensures the SFM’s success (Ruback & Yudkoff, 2017; Johnson 2014; Kolarova et al., 2020; Li &
Grousbeck, 2003). Thus, the model became an attractive asset class for investors in the first place
(Dennis & Laseca, 2016). Johnson (2014) argues that although the strict criteria set for evaluating
an acquisition target ensures the success of the SF entrepreneur and reduces the risk for the inves-
tors, there are not many small companies that comply with the criteria. However, industries and
business opportunities can deliver unique value propositions despite a complicated business model
or other shortcomings (Johnson, 2014). Dennis and Laseca (2016) admit that with a rising number
of pitched deals deviating from the traditional focus on business services, investors need to be more
open for industries outside the traditional SFM focus and evaluate unique opportunities on a case-
by-case basis (Dennis & Laseca, 2016).
Proposition 4: Searchers not finding enough target companies fulfilling the strict SFM criteria hinders
SFM adoption in the German-speaking markets.
Proposition 5: Searchers from German-speaking countries decide against the SFM because of low flex-
ibility in choosing acquisition targets.
As Figure 1 reveals, different approaches to ETA have evolved as efficient alternatives to SFM
(Yoder et al., 2018; Dennis & Laseca, 2016). Depending on the searchers’ needs for external capital,
guidance and infrastructure, each approach to ETA has its own profile and related dis-advantages. De-
pending on the searchers’ capacity and willingness to finance the search for and the acquisition of a
target company with private capital, SFM can be an attractive option (Dennis & Laseca, 2016; Yoder et
al., 2018; Kelly & Heston, 2020). Thus, we conclude:
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Proposition 6: Searchers from German-speaking countries choose SFM as a way into entrepreneurship
for its low need for personal equity investment.
Proposition 7: Searchers from German-speaking countries decide against SFM because of a well-es-
tablished debt financing infrastructure for business succession.
RESEARCH METHODOLOGY
Methodology
Due to its early research state, a considerable complexity of the research topic and the anatomy of the
research question, the application of a qualitative research design based on the development of case
studies deems useful (Yin, 2018; Eisenhardt & Graebner, 2007). Another reason for not employing
quantitative research is the simple fact that the number of SFM applications in Central Europe still
rests on a rather low level. Kolarova et al. (2020) could identify only 10 formed SF since 2010 in Ger-
man-speaking countries and two in Poland (Kolarova et al., 2020). Besides that, qualitative research is
advantageous as it allows deeper dives into reality.
Building on prior research, the procedure was deductive and confronted developed causalities with
reality. However, to be open for new insights from reality, the cases rest on semi-structured interviews
– as prime data source – with an interview guide that starts with narrative parts prior to the reality
check of the propositions. This allowed gathering data beyond the set of propositions by additional
inductive research that could add to a more comprehensive understanding. After the narrative inter-
view part, the structured section followed the research question and the developed research proposi-
tions directly. The questions were tested prior to the first interview to ensure comprehensibility by the
interviewees. Following the suggestions by Yin (2018) and Eisenhardt (1989), observations made by
the interviewer and secondary data analysis (websites, press releases, reports) were additional, sup-
plementary methods for the sake of triangulation (Ndofor et al., 2015).
Data sourcing
To get a thorough first overview of the SFM application, the perspective of the ‘jockey’ was chosen.
As the aspiring entrepreneurs are the first and foremost binding element within the SFM, they are
in close contact with all the stakeholders involved and hence experience the benefits and limitations
of the model first-hand.
A keyword search in public press and forums sought to identify potential interview partners. Within
the German-speaking countries, 10 former or still active SF could be identified and four searchers with
knowledge of SFM who eventually decided to pursue a different ETA model. Eight of them (A-H) were
willing to share their experience. The number of identified SFM-based ETA and their distribution over
the German-speaking countries coincides with Kolarova et al. (2020).
Hence, the prime data source were eight interviews conducted in November and December 2020
with German, Austrian, and Swiss searchers, all of them male and between 25 and 40 years of age and
familiar with SFM. The interviews lasted between 20 and 60 minutes. All interviews were held in the
native language of the interviewees to avoid translation problems. The interviews were recorded and
transcribed. As the data collection could unveil sensitive data on the investment process which could
be subject to a nondisclosure agreement and likewise to allow the interviewees to speak frankly about
their experience, the interviews had to be transcribed anonymously.
Four interview partners raised SF to search for and acquire a company. One more searcher had just
started out and was in the fundraising stage when interviewed. Three interviewees followed an alter-
native model: A and D did a self-funded search and E decided to go with a single investor to finance
multiple searches. Overall, six searchers were successful in searching for and acquiring a company.
Interviewees B, C and H successfully went through all stages. Only C has successfully exited so far.
Interviewees B and H are still operating their acquired targets. Table 1 provides an overview of the
interviewees and SFM-related issues.
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Data analysis
Supported by QCA software, data analysis followed the structuring qualitative content analysis accord-
ing to Mayring (2021) based on deductively formulated categories. In detail, the method of contextu-
ally structuring content allows filtering common topics, content, and aspects from the underlying ma-
terial (Mayring, 2021). Structuring according to the content helps to filter out predefined content
(Mayring, 2021). As for coding, the procedure started by coding first-order data. The codification fo-
cused on the single interview first, based on individual paragraphs. In the second step, codification was
applied on all interviews simultaneously using the paraphrases of the single interviews. According to
the deductive category forming procedure, seven main categories and a total of 18 subcategories were
identified out of the available SFM literature and the theoretical considerations in accordance with
Mayring’s (2021) approach. In this vein, the single interviews were reviewed by the help of the cate-
gory system, single statements translated and paraphrased and then assigned accordingly to the sub-
category system. After this, the abstracted material was summarized according to the categories.
RESULTS AND DISCUSSION
Results
To check the research propositions one by one, we identified and specified categories. The categories
were defined deductively out of the available literature on the SFM and the abducted theoretical con-
siderations, condensed within the set of propositions (Mayring, 2021). The propositions were con-
fronted with the empirical findings. As the empirical research allowed both open response and struc-
tured feedback on the propositions, category development had to take this into account. Insofar, the
developed categories are an umbrella to connect the literature-based structure of the propositions
with field data. This explains why the terms used in the category system are similar but not identical
with the factors of the propositions. Moreover, the sub-categories allowed considering all relevant
factors from the field that sometimes go beyond prior research.
The further procedure rested on the three-step approach according to Mayring (2002). The first step
was about defining major (sub-)categories and allocating statements to them. The second step rested on
providing anchor examples with a prototypical function out of the transcribed material, while in the third
step, the definition of coding rules for a guideline to assign statements to the categories took place.
Table 2 portrays the (sub-)categories and related findings in overview. For example, P1 is about
the acceptance of the SFM among relevant stakeholders in the German-speaking markets. Lacking
knowledge and scepticism are typical for this category. Along the single propositions and the related
constructs, all the categories were developed in this vein.
Proposition check
According to P1, the SFM is not yet sufficiently known among stakeholders and, hence, not accepted
as a concept for business succession in the German-speaking markets. The statements of the interview
partners principally supported this. Six of eight interviewees stated German-speaking markets are un-
familiar with the model and/or that they faced scepticism about SFM, particularly regarding the value
proposition. Four out of eight searchers named a lack of knowledge among company owners or inves-
tors and among young graduates trying to find a way into entrepreneurship. Interviewees B, F, and G
saw business schools and universities responsible for this situation.
The smaller markets are the reason why the SFM is not as well-known as in the USA. … Another
reason for this is the missing culture of MBA graduates. … In Germany, your professional career
does not get interrupted by an MBA (B, ll. 342-343, all translations by the authors).
You cannot tell SME owners that you are doing a SF, as they do not know the concept …. This
is why we did not use the term ‘search fund’ but ‘business succession entrepreneurship’ when
introducing ourselves. (C, ll. 225-119)
Germany has not been an active market for search funds (F, l. 60).
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Only very few institutions are currently promoting the model. Classic business schools must
promote the model more intensely (G, ll. 207-208).
Table 2. Categories in overview
Category (C) Sub-categories Condensed findings
C1
Unfamiliarity
11 Knowledge Stakeholders do not know SFM.
12 Scepticism Stakeholders do not see the value surplus compared to other models,
e.g. management buy-in or private equity.
C2
Attractiveness
21 Acceptable risk Searchers perceive low risks with the SFM.
22 Experience Searchers perceive the investor’s experience and guidance as helpful in
making an acquisition.
23 Upside Searchers perceive a comparably predictable and high upside of the
SFM.
C3
Disadvantages
31 Limited control Searchers
perceive lower control over the company due to lower equity
share by the SFM.
32 Limited upside Searchers perceive lower financial upside due to lower equity share
with the SFM.
C4
Available
targets
41 Search criteria Searchers perceive the search criteria of SFM hindering in finding a tar-
get.
42 Narrow market Searchers perceive the German-speaking markets low on targets ful-
filling traditional search fund criteria.
43 Competition Searchers perceive competition for targets due to the criteria of SFM.
C5
Limited
flexibility
51 Freedom Searchers perceive more freedom in choosing their target outside the
SFM.
52 Regionality Searchers perceive more regional flexibility with choosing a target out-
side the SFM.
C6
Capital slack
61 Low private capital
Searchers perceive the low need of personal equity investments within
the SFM beneficial for their search.
62 Slack resources Searchers perceive the slack resources within the SFM beneficial for
their search.
C7
Financing
alternatives
71 SME bank Searchers perceive a combination with SME bank financing, e.g. KfW
bank, a sufficient alternative for their deal financing.
72 Bank debt Searchers perceive traditional bank financing a sufficient alternative for
their deal financing.
73 Seller note Searchers perceive a combination with a seller note a sufficient alterna-
tive for their deal financing.
74 Guarantor bank Searchers perceive a combination with a guarantor bank, e.g.
Bürgschaftsbank, a sufficient alternative for their deal financing.
Source: own study.
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. 380-382).
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. 319-334).
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. 369-370).
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All in all, the interviewees shared how unfamiliar and, thus, sceptical German-speaking markets
are when it comes to deciding on SFM adoption. On this note, we alter P1 moderately.
P1 new. Considerable unfamiliarity of actors with SFM hinders its adoption in the German-
speaking markets.
Next, P2 points to factors why young aspiring entrepreneurs favoured the SFM and ETA. The SFM
seems to offer entrepreneurs low entrepreneurial and financial risk, a clear structure, and support of
experienced investors to realize an attractive upside. For this reason, P2 seeks to find out whether search-
ers see these advantages and decide for SFM accordingly, keeping in mind that P3 targets disadvantages.
Therefore, P3 tries to elaborate reasons for pursuing alternative ETA models. On this note, only B, C and
F, G and H had actual SFM experience, whereas A, D, and E chose alternative models. The searches of A,
B, C, D, E, and H were successful, F has not found anything, and G was just starting out at the time of the
interview. For six of eight interviewees low risk was one of the advantages of following the SF.
You have a clear risk structure (A, l. 163).
A SF is more risk averse than a self-funded search. … Your downside is also low (D, ll. 74-76).
Both F and G were not successful, yet, in following SFM. These two were the only ones not confirming
the advantage of low risk.
Seven searchers found the experience of investors and their guidance helpful in going through the
steps of the SF process and making an acquisition, even though two of them did not pursue the SFM track.
And you get a lot of due diligence experience and external professional experience. … The in-
vestors are your sparring partners (A, l. 165 and 299).
It is like a founding board to whom you can talk (B, l. 480).
Half of the interviewees confirmed the factor of financial upside as a key decisive factor for choos-
ing SFM. Three of them pursued the SFM track.
You receive 30% equity stake of a very good company. … The terms are reasonable the way
they [were] originally designed (B, ll. 334-335).
It does not work every time, but when it works, it is awesome. … You will be an established
entrepreneur after five years and will have built up wealth (F, ll. 390-395).
Most searchers agreed on the factors making SFM attractive. The subcategories of low risk, expe-
rience, and upside can be found with a total number of seventeen out of twenty-four possible times.
These advantages were seen by searchers with SF experience and those without. Hence, we see a need
to modify P2 slightly by speaking of acceptable rather than low risks. All the developed sub-categories
of C2 find high levels of support so that they should remain in P2.
P2 new. Searchers from German-speaking countries favour the SFM structure and guidance to
create financial upside at an acceptable risk level.
When it comes to P3, 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. 170-172).
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).
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While not explicitly stated, the inconvenience effect of SFM is apparent. Besides that, interviewees
stated a higher financial upside without the need to fulfil the financial expectations of investors, who
otherwise would have an equity stake in the target company.
You do not have to fulfil the investors’ growth and return expectations. … This is a kind of free-
dom (A, ll. 173-179).
If you buy the company on your own with debt-financing, your personal upside is higher than
with a search fund (B, l. 474).
While the interviewees were rather unanimous regarding the factors causing the SFM attractive-
ness, only half of all interviewees confirmed the factors leading to low attractiveness and the final
choice of alternative ETA models. The subcategories of higher control and higher upside outside SFM
play a role but obviously only limited so and depending on context. It takes more empirical work to
specify these contingencies. Insofar, it deems useful to formulate P3 more cautiously.
P3 new. Lower equity stake and lower control in the case of SFM make searchers from German-
speaking countries more alert of other ETA models.
Next, P4 addresses the availability of a sufficient number of target companies. The related sub-
categories of C4 are (strict search) criteria, (narrow) markets and competition. Four interviewees ad-
dressed the strict criteria sets.
No production industries fit the criteria because they are too capital- and labour-intensive and
have too low margins (A, l. 217).
But of course, there are many filter criteria like asset-light and others which make the search
phase difficult (C, l. 299).
Only three of eight interview partners directly touched on the German market size.
In Europe, markets are smaller. It is relatively more difficult to find a good deal than in America
with a five-times bigger market. … It is a high risk that you do not find a company (B, ll. 337-353).
Good companies, that are for sale, do not hang like apples on trees, ready to pick (F, l. 131).
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).
The considerations of this section require a specification of P4.
P4 new. Strict search criteria, ETA model competition, and to some extent limited market size
hinder SFM adoption in the German-speaking markets.
As for P5, it addresses the limited flexibility of SFM in choosing acquisition targets with considera-
ble opportunities. Freedom in choosing their target outside SFM and regional alternatives beyond SFM
explain this limited flexibility. All interviewees voiced downsides of SFM in terms of flexibility. Some of
them perceived more freedom in choosing a target company outside SFM.
With a self-funded search, you can also buy [smaller companies], which you cannot with a
search fund (B, l. 465).
There may be investors that tell you not to buy an IT company because they already own sev-
eral IT companies and want to diversify their portfolio (C, ll. 509-514).
For some deals, you need two years. You cannot do this with a search fund, because until then
the fund will have expired (E, ll. 242-243).
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Four searchers mentioned higher flexibility in searching regionally beyond SFM. This downside about
the freedom of choice in terms of staying regional is relevant to searchers with actual SFM experience.
If you do not want to or cannot move, a self-funded search is better for you (B, l. 462).
Most searchers also have life partners or spouses. … you have to move to where your target
company is situated (C, l. 556).
Half of the interviewees mentioned the perception of higher flexibility in following unique oppor-
tunities, 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. 269-296).
Interviewees stressed the obstacles related to the trilateral constellation of investors, searchers,
and predecessors that can make situations complicated. Insofar, there is no need to modify P5.
According to P6, searchers choose SFM for the low level of personal capital investments. This holds
over time for the investments in the initial search and later for the acquisition itself. Moreover, it allows
the availability of slack resources. Data reveals searchers’ willingness to finance the search and the
acquisition by themselves as decisive factor for the decision on choosing SFM. Half of the interviewees
saw a clear advantage of SFM in terms of limited equity investments.
[B]ecause you as an individual need to invest less capital (D, l. 75).
Right after my MBA, a self-funded search was out of question for me (F, l. 38).
Six of eight searchers considered the availability of financial resources for the search and due dili-
gence (including broken deal fees), and committed investor capital, which can be used in the acquisi-
tion financing, an SFM advantage over self-funded ETA.
With a search fund, the financial resources are higher, so that you can look at larger deals (A, l. 167).
As a search funder, you are financed in advance, you have all the time in the world to find a
good business (F, l. 391).
I was concerned that if I finance the search myself, I would not be as objective in my decision
making (H, l. 181).
On this note, we can leave P6 unchanged. The statements suggest interesting backgrounds associ-
ated with capital availability future research can build on to refine the causal background.
As for P7, the well-established debt financing infrastructure for business succession comes into
play that may be disadvantageous for SFM adoption and privilege financial alternatives. Four searchers
explicitly mentioned special SME bank loans of the KfW Bank being available in German markets al-
lowing debt financing at a low interest rate for ETA purposes.
In Germany, there is the KfW founder’s debt financing, where you can get up to 500,000 Euro
at a very low interest rate (D, l. 101).
In this vein, four searchers stated that deal financing with bank debt is possible in German-speaking
markets and can replace venture capital of investors.
In Germany, you can easily finance an SME deal with your house bank (A, l. 66).
Until … a deal size of five million Euro, I recommend doing a self-funded search if you have
between 5 to 10% own equity capital. (D, l. 132).
Three searchers mentioned the possibility of a seller note, meaning financing by the seller directly
to the buyer. This financial capital can be used as equity in financing the deal with a bank. Furthermore,
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three out of eight interview partners pointed to guarantor banks as a helpful tool to secure debt fi-
nancing with banks.
In Germany, there is the guarantor bank Bürgschaftsbank. … They help with guarantees …. In
fact, this is a credit default swap. They partially cover the default risk (A, ll. 83-86).
Against this background, as most of the interviewees confirmed, also P7 holds. When it comes to
the individual combination of financing instruments, less statements were given. It appears, that the
instruments of a seller note and the guarantor bank, which reduce personal liabilities and risks, are not
commonly known among searchers. This can also be subject to future inquiries.
Discussion
This study is the first one dealing with a Central European background and specifying the peculiarities
of SFM adoption in German-speaking countries. The findings deviate from those concerning other re-
gions of the world (Dennis & Laseca, 2016; Kelly & Heston, 2020; Kolarova et al., 2020). Particularly,
the results from this qualitative research reveal that SFM is an attractive model for niches in the re-
gional market. However, despite this finding there is still a long way to go to become an established
and recognized model of ETA. Among the prime factors hampering SFM adoption, we found unfamili-
arity. Moreover, the particular profile and the advantages of SFM are not evident enough to make this
model more popular in the German-speaking countries. While insiders perceive SFM’s pros (low risk,
available experience and guidance, attractive financial upside, limited investments of searchers) and
cons (lower control, reduced upside, inflexibility, limited number of targets) with the according impact
on model attractiveness, the contingencies for SFM in Germany are not favourable in all regards. Mar-
ket structure and competition of alternate models cause a slow adoption.
Regarding the question how and why does the SFM facilitate acquiring businesses in German-
speaking countries to aspiring enterpreneurs, there is evidence from data that the trilateral constella-
tion of searchers, investors, and predecessors provides opportunities that are absent in the case of
alternate ETA models. However, the set of propositions developed from literature does not entirely
hold when confronting it with data from the field. Insofar, four out of seven propositions underwent
at least slight adaptations. Moreover, field data helped specifying the background of the causalities
derived from prior research (Ruback & Yudkoff, 2017; Dennis & Laseca, 2016; Johnson 2014; Fund &
Hunt, 2012; Kelly & Heston, 2020; Kolarova et al., 2020; Li & Grousbeck, 2003). The involvement of
investors enables young searchers to go for ETA with a specific opportunity/risk profile. While there
are evident perspectives of realizing rents, searchers are to some extent framed by the investors with
considerable discretion regarding decisions to be taken. Limited, shared profits on the one hand side
and limited risks on the other may look like a somewhat ‘fair’ compromise. In fact, investors allow
opening doors that would be shut otherwise, as young searchers need guidance and advice as much
as financial support when trying to make successions happen. This unveils the enabling role of SFM
that is still not fully realized in German-speaking ETA settings. On this note, the response to the ‘how
and why’ question rests on (i) the trilateral governance constellation with its steering potential, (ii) the
additional financial resources brought in by the investors, (iii) the higher level of expertise and moti-
vation, and (iv) the potential match of the triad’s actors. Over and above the findings are in line with
typical contextual factors of entrepreneurial behaviour in German-speaking countries, particularly
when it comes to risk-related issues, other studies deal with by pointing to the extraordinary fear of
failure or ‘German Angst’ (Berger & Freiling, 2017).
CONCLUSIONS
On this note, the study contributes to prior research as follows. Firstly, the study specifies factors that fa-
vour or hinder SFM adoption. With the sub-categories, 18 constructs underwent a first empirical test that
revealed specific relevance. Secondly, the study allows insights regarding the SFM profile vis-à-vis compet-
itive ETA models. Thirdly, the study sheds light on the situation in Central Europe, exemplified by the Ger-
man-speaking countries with their strongholds in family business and small- and medium-sized entities.
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As the awareness of SFM is low even in the entrepreneurship and investor scenery, it is necessary to
inform actors more comprehensively than before. This may be a task for both academicians (studies and
courses) and practitioners. Certain platforms connecting successors and predecessors may be useful in
this regard. The impact of role-models and benchmarks should be considered to increase awareness.
Another issue is the transfer of best SFM practice between different regions in the world. The US
experience is already very comprehensive due to the early launch and the bigger number of SFM cases.
Experience from other regions may also be useful. Moreover, we need to understand the contingencies
of SFM more comprehensively to tailor regional SFM models. As for next steps of SFM development,
interviewees explicitly suggest a further refinement of the model for a better support of searchers with
infrastructure, guidance, and experience and accessibility to investor capital. This could work within
the framework of an incubator or accelerator model. Like this, searchers experience more flexibility
and can take advantage of a stronger focus on a single role within the process.
The cases rest on triangulated data from different sources. While employing typical means of as-
suring the data quality in qualitative research, prime information sources are the interviews for the
cases. In every case, we conducted only one interview. Although meaningful and rich data could be
sourced this way, this procedure is prone to key informant bias.
Another limitation is the focus on the searchers’ perspective. The point of view of the other stake-
holders in this three-sided relationship, like the seller and the investor, might render different results
and a more holistic view on the underlying research topic.
Interview and other data stem from different points in time. However, the interviews as prime
source were conducted at one point in time. One can argue that ETAs as SFM are dynamic phenomena
with the need to analyze developments. The snapshot view can, thus, be myopic. Finally, we followed
primarily a deductive procedure. However, we conducted semi-structured interviews allowing for
searchers’ narrations that were not influenced by the interviewer. Nevertheless, it is possible that the
results of a purely inductive procedure may deviate from the findings of this study.
There are many options to build on the findings of this study. Future research may go for modelling
the factors influencing SFM’s adoption process. The different sub-categories inform future endeavours
by providing constructs for modelling.
Future studies could have a closer look at why the identified factors hinder the model’s application.
Related to this, it could be of interest how SFM could be adapted to decrease or circumvent these
hurdles. As already shown (P6), it could be interesting to look behind the causalities of the research
propositions more comprehensively. This study was a first dive with results that range both on the
descriptive and analytical level.
It would be useful for a better understanding of the SFM adoption processes to increase the
analytical depth.
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Authors
Contribution to this article: Freiling 50 % / Oestreich 50 %.
Jörg Freiling
PhD (Dr. rer. oec.), Full Professor and Head of the Chair in Small Business and Entrepreneurship, University of
Bremen, Germany. His research interests are transnational entrepreneurship, entrepreneurial ecosystems,
entrepreneurial support systems, incubators, accelerators, business model innovations, corporate entrepre-
neurship, and small firm governance.
Correspondence to: Prof. Dr. Jörg Freiling, LEMEX, Faculty for Business Studies and Economics, University of
Bremen, Enrique Schmidt Str. 1, D-28359 Bremen, Germany, e-mail: freiling@uni-bremen.de
ORCID http://orcid.org/0000-0001-6922-9805
Max Oestreich
MBA Graduate at Johannes Kepler University Linz, Austria – LIMAK Austrian Business School. His research in-
terests have so far been in the fields of new venture creation, mergers & acquisitions, entrepreneurship
through acquisition, and business succession.
Correspondence to: Max Oestreich, MA MBA, Eben 29a, A-4202 Kirchschlag bei Linz, Austria, e-mail:
m.oestreich@mci4me.at
ORCID http://orcid.org/0000-0002-2027-9980
Conflict of Interest
The authors declare that the research was conducted in the absence of any commercial or financial relation-
ships that could be construed as a potential conflict of interest.
Copyright and License
This article is published under the terms of the Creative Commons
Attribution – NoDerivs (CC BY-ND 4.0) License
http://creativecommons.org/licenses/by-nd/4.0/
Published by Cracow University of Economics – Krakow, Poland
