Invest directly in the German Mittelstand with our German Search Fund concept
Based on the adapted concept of a Search Fund, we offer wealthy investors, HNWIs (high net worth individuals) and family offices the opportunity to invest in company successions directly acquiring (i. e. with no intermediate fund structure) medium-sized companies in Germany. We pre-select suitable takeover targets and, if necessary, find the right management for the succession. In addition, we continue to support the companies after the takeover as PART-TIME CFO and thus continuously increase the value of the company.
A search fund is an investment vehicle in which investors financially support an entrepreneur’s efforts to find and acquire a privately held company. In our concept however, no complicated fund structure is chosen, but an individual investor directly acquires the company, which is searched, screened and pre-selected by us. A typical purchase price or investment amount is between 3 and 10 million EUR. An analysis by the Center for Entrepreneurial Studies (CES) at the Stanford Graduate School of Business of 401 qualified search funds from 2020 showed an average pre-tax total internal rate of return of 32.6% and a 5.5x increase in pre-tax invested capital.
Value drivers: Why can you expect such a high potential return with our concept based on search funds?
a) Very low valuations for small acquisitions with 4 — 6x EBIT multiple compared to larger M&A transactions with 10 — 13x EBITDA multiple. The difference between EBIT and EBITDA is depreciation and amortization added to EBIT, i.e. the valuation base is additionally higher for larger companies as a result.
The DUB SME multiples are suitable as the valuation method for companies with sales below EUR 20 million.
Note: In the above mentioned CES study, the search funds paid an average purchase price of 6.0x EBITDA multiple, i.e. more than what is usual in the German market.
b) Higher profitability through professionalization of management and continuous operational improvements
“Given the comparatively low level of management ratings for German SMEs, there is considerable catch-up potential.”iwf Kiel: Management Practices and Productivity in Germany, Working Paper, 20116
“Improving the quality of management, as we measure it, by one point is equivalent to increasing capital by 65% or labor by 25% and applies to all companies regardless of industry, profitability, past productivity, growth, and size. …”World Management Survey, Manufacturing Report 2014, translation, 13,000 interviews in 33 countries).
c) From experience, the even stronger driver: revenue growth while maintaining fixed cost discipline (e.g., through sales focus/KPIs, synergies when buying multiple smaller companies, i.e., especially “cross selling” to customers)
d) Develop and expand the business model with digitalization and internationalization.
e) Long-term exit strategy: once the company has grown larger, private equity firms come into question as buyers, paying significantly higher takeover prices for companies.
The search fund model targets a fragmented and inefficient part of the market that is too small for institutional investors and too large for most angel groups. Search funds benefit from the fact that companies with EBITDA of less than $5 million are not attractive to the rest of the world. However, once an entrepreneur has built a company with EBITDA above $5 million, the rest of the world is interested and often willing to pay a high price for it.Rob Johnson(IESE): Search Funds — What have made them work
There have been only a few active search funds in Germany so far, whereas there are many more search funds in the US as well as Spain. At the same time there are many medium sized companies which require a successor. Here is one article from 2017 about the German situation in English, but it is still relevant;