Action often proves wiser than attraction in many situations.
In the bustling landscape of German business, a unique phenomenon is reshaping the economy: the Search Fund model. This innovative approach, backed by institutions such as the European Investment Bank (EIB) and its partner financial institutions, is driving the purchase of small and medium-sized enterprises (SMEs) and midcap companies.
The allure of this model lies in the impressive returns it offers. With an internal rate of return (IRR) surpassing 35% and a return on investment (ROI) that is around 4.5 times the capital invested, these funds have caught the attention of banks, eager to finance company takeovers due to the proven stability and profitability of established businesses.
The buy-and-build concept, a key strategy in this model, involves acquiring and consolidating several similar companies. This approach drives returns through synergy effects and multiple arbitrage, where small firms are bought at multiples of 4 to 6 and later sold as larger units at multiples of 8 or more.
Companies change hands for between four and eight times their earnings before interest and taxes (EBIT), depending on the industry, profitability, and growth. Many family-owned businesses, such as heating, sanitation, and air conditioning service providers (SHK) or technical building equipment suppliers (TGA), are prime targets for takeover, offering immense opportunities for value creation.
Established operational structures, running processes, and well-trained employees allow the successor to focus on further development immediately. These companies often boast a proven product-market fit, an established customer base, and generate revenue. While they may not have unicorn potential, they can be taken to a completely new level through digitalization, marketing, or automation.
More efficient processes, targeted customer communication, and modern technologies not only drive growth but also increase profitability. This, in turn, benefits investors, who reap the rewards of motivated entrepreneurs with 'skin in the game' and above-average returns.
Around 125,000 businesses in Germany seek a successor each year, presenting a real opportunity for the German economy. The Search Fund model offers advantages to the Searcher, such as little equity, low risk, and long-term involvement in the success. The Searcher takes over operational management and receives a minority stake, while the majority remains with the investors.
Without a buyer, many businesses may close, leading to loss of jobs, know-how, and stability. By facilitating these takeovers, the Search Fund model is not just transforming the German economy but also preserving its vitality.
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