Search Funds: From EU to Belgium

Introduction

1. In Europe, family-owned businesses account for around 85% of all companies. As the baby-boomer generation approaches retirement, many of these firms face imminent leadership transitions without suitable internal successors. Meanwhile, there are plenty of ambitious (young) entrepreneurs who aspire to take over a company but lack financial means or experience to do so. Belgium is no exception to these challenges: small and medium-sized enterprises (SMEs) represent approximately 98% of the Belgian entrepreneurial fabric, yet nearly 70% of SME owners who wish to transfer their business ultimately fail to do so properly. 

2. Against this backdrop, the search fund model has emerged as a structured mechanism designed to facilitate acquirer’s financing capacities, ownership transfer and managerial continuity. Originating from the US, and although still relatively recent in Europe, the model has expanded rapidly worldwide, with more than half of all search funds launched since 2019. In Belgium, interest in the model has accelerated in recent years, with several domestic actors entering the ecosystem and public institutions (such as Wallonie Entreprendre - of which Bird & Bird is a certified partner and expert) beginning to support such initiatives.

3. This article briefly explores the search fund model, its functioning and governance, and its growing relevance for entrepreneurs, investors and SME succession in Europe and Belgium.

What Is a Search Fund?

4. A search fund is an investment vehicle in which one or a few individuals, (the Searcher), have raised capital from a limited group of private investors (the Investors) in order to finance the search of a privately held company (the Target Company) with a view to acquiring, managing and then potentially exiting it. The model is often described as entrepreneurship through acquisition, as it combines elements of traditional entrepreneurship with certain structural features commonly associated with private equity (PE), while remaining clearly distinct from both (see point 15).

5. One of the main particularities of the search fund model is that the Searcher is an ambitious entrepreneur who has not his own business but rather wants to seek out and acquire one, and needs financial and structural support to that end from Investors. When the latter are asked to quickly explain the singularity of this model from their perspective, they usually answer as follows, in simplified yet striking terms: “we do not invest directly in an SME, but in entrepreneurs who want to acquire and run an SME.” (Belgian newspaper L’Echo, 2024).

How does a Search Fund work?

6. The process begins with the Searcher looking for Investors to raise capital to finance the identification and evaluation of potential Target Companies. Once prospective Investors have been identified, the Searcher typically prepares a private placement memorandum (PPM), mainly setting out his or her background, motivations, intended geographic and sector focus, and the proposed search budget. In exchange for financing the search phase, Investors have the right, but usually not the obligation, to participate in financing the acquisition (and thus receiving shares) when a Target Company is subsequently identified. Should the Searcher do their best but ultimately fail to identify or acquire a suitable Target Company, then the consumed search capital is in principle not reimbursed to the Investors.

7. Once the search is funded, the Searcher, often alone but sometimes in consultation with the Investors, defines or details acquisition criteria and begins to “search” for potential targets. The typical Target Company is profitable and operates in a stable or growing, fragmented market, with a loyal and diversified customer base generating recurring contractual revenues. It usually also benefits from a solid existing management team, which gives the Searcher time to understand the business before implementing changes.

8. As soon as the Searcher has identified a suitable Target Company, it must first present it to the Investors for their approval. If a sufficient number of Investors agree to move ahead, and other aspects of the deal fall into place (including completing due diligence and securing additional financing, if needed), the acquisition takes place. Investors who are part of the search fund have priority to participate in the acquisition, and their share is typically determined pro rata to their initial contribution to the search fund (see more on shareholding structure in point 9). New investors may also join at the acquisition stage, though they are not given priority and are usually only approached if additional capital is required. 

9. Following completion of the acquisition, the Searcher is habitually appointed as managing director or CEO of the Target Company. One or more key Investors may also be appointed as directors, primarily to ensure governance oversight rather than to assume operational responsibilities. With regard to the classic shareholding structure of the Target Company, while the Investors finance the biggest portion of the purchase price, they are not allocated the exact corresponding percentage in shares. Indeed, the Searcher typically receives a much larger percentage of shares than what their financial contribution (if any) would justify. This is because of so-called “sweet equity”: the Searcher's share percentage, e.g. 20%-30%, mainly reflects the huge value they bring through their work (and expertise).

10. A defining characteristic of the search fund model is its long-term orientation. Unlike conventional M&A or equity structures, an early exit is generally not the primary objective. In practice, Investors often begin to partially realise their investment after approximately 5 years. They commonly do so, at least under the traditional search fund model, by progressively selling shares to the Searcher, either directly or through dividend funded buyouts or refinancing transactions. From that moment until approximately 10 years post-acquisition, the ownership structure therefore tends to become increasingly concentrated in the hands of the Searcher, who may ultimately become the sole or controlling shareholder. Of course, alternatives are possible. One of them is that the Investors may sell their shares to other (new) investors instead of to the Searcher, for instance if the latter is not ready to buy the shares. However, these types of alternatives are less characteristic of the traditional search fund model as described in this article.

Why Is It Attractive?

11. For the Searcher, the model provides a structured and financed pathway to entrepreneurial leadership and ownership. Searchers are typically highly motivated individuals with strong entrepreneurial ambitions but without a structured business idea or the financial means to acquire a company independently. The search fund structure enables them to obtain capital, credibility, and institutional support while working toward a clear objective, namely assuming a long-term leadership role within the Target Company.

12. For Investors, they provide an opportunity to achieve attractive returns while diversifying portfolio risk through investment in private businesses rather than financial assets. Empirical evidence from North America indicates that search funds have generated average annual internal rates of return exceeding 20% over the past decade, with emerging European data showing comparable performance patterns. 

13. For sellers of the Target Company, search funds frequently represent a compelling solution in the context of end of career succession. Although competing buyers may sometimes offer higher purchase prices, sellers could also be tempted to favour the search fund model for its ability to preserve business continuity, identity and employment. Searchers often meet these expectations by committing to long term stewardship and maintaining the firm’s culture and relationships.

Main difference with other models?

14. Apart from the Searcher’s particularity described above in point 5, the search fund model also differs in other ways from neighbouring models, as briefly illustrated below.

15. PE funds typically build diversified portfolios and rely on external professionals to run the Target Company’s day-to-day operations while the PE fund itself oversees performance from a distance through its board representation. On the contrary, a search fund focuses on the acquisition of a single Target Company in which the Searcher typically takes an active operational capacity as managing director or CEO (see point 9 above for more detail). 

16. Search funds are also distinct from venture capital (VC). VC funds primarily finance early-stage companies with uncertain business models, whereas search funds deliberately target established and profitable companies. VC funds also usually deploy larger pools of capital across multiple portfolio companies, accepting higher risk in pursuit of outsized returns within a shorter investment horizon. 

17. Finally, search funds differ from SPACs (Special Purpose Acquisition Companies) in their approach to raising capital: whilst a SPAC raises capital through a public IPO, a search fund does so privately.

Conclusion

18. Search funds offer a timely and well-structured response to one of Europe’s most pressing economic challenges: ensuring the successful transmission of its SMEs to the next generation of business leaders who temporarily lack financial resources. By uniting strong financial incentives with the preservation of the seller's personal legacy, the model deserves serious attention from entrepreneurs, investors, and business owners alike. 

19. Given the complexity of the underlying legal and governance documentation, including the shareholders' agreement and investor arrangements, Bird & Bird stands ready to assist Searchers, Investors, and sellers in structuring and executing their search fund transactions.