Capittal's view: search funds and Spanish SMEs, opportunity or risk

Quick answer

Capittal's view is that a search fund can be a good buyer for a profitable SME with an unresolved succession, recurring cash generation and a stable team. It is neither better nor worse than a fund or a trade buyer: it is a buyer with a different risk profile. It buys with capital that is committed but not drawn down until closing, so the seller should check three things before sitting down: who is behind it, how the purchase is financed and what happens if the bank says no.

What exactly is a search fund, and how does it differ from a fund?

A search fund is a vehicle set up by one or two people to buy a single company and run it. The buyer is not assembling a portfolio. They are looking for their company, the one they will manage personally for years.

Behind those individuals sits a group of investors who fund first the search and then the acquisition. That structure explains the differences with the other two buyer profiles they will compete against in your process.

• Against a private equity fund. The fund has already raised its money, buys several companies and runs none of them: it appoints a chief executive. The search fund holds investor commitments for a single purchase, and the buyer sits in the office themselves.
• Against a trade buyer. The trade buyer pays for synergies and usually folds your company into its own commercial or industrial structure. The search fund buys a business that already works and wants it to keep working on its own, merged with nothing.

You are negotiating with a person who will make a living from your company, not with an investment committee reviewing a portfolio.

Why do search funds look at Spanish SMEs?

Spain has a large number of profitable, family-owned companies with no succession in place. For a search fund that context is attractive: it allows them to acquire businesses with a track record, an established customer base, recurring cash and room to professionalise. For the seller it can be an orderly exit when there is no family successor, or when the priority is that the business carries on.

There is a second reason, less often discussed. In Spain's mid-market, your company may be too small for a private equity fund, which needs to deploy large tickets, and too self-contained for a trade buyer who only moves when there is a clear synergy. The search fund lives exactly in that gap.

The appeal does not remove the risk. A search fund normally needs bank debt, the actual drawdown of its investors' capital and a well-designed transition plan. If any of those pieces fails, the deal drags on or gets renegotiated.

What kind of company does a search fund look for?

The profile is narrower than it looks, because the buyer will run the company and a bank will finance it. These are the traits that count.

• Proven profitability and stable cash. Without recurring cash there is no bank debt, and without debt there is no deal.
• Low dependence on the owner. The buyer can replace the owner in management, but cannot inherit their contacts book in three months.
• An operating team that already works. Middle managers able to hold the day-to-day together while the buyer learns the business.
• A sector the buyer understands. Almost no searcher buys outside what they have worked in or studied in depth.
• Little technological disruption and contained capex. It lowers the risk of their investment case and leaves cash to service the debt.

Poor fits are businesses where the founder is indispensable, those that hang on a single contract, highly cyclical ones and those needing heavy investment before they generate cash. If your company falls into that group, a search fund is still a possible candidate, but it will push for more deferred consideration.

How is the purchase financed, and why does that matter to me as a seller?

This is the difference that genuinely affects you. A search fund does not arrive with the money in the bank: it arrives with commitments.

• Its investors' capital. Committed, not drawn down. Each investor decides whether to back this particular deal once they see the company.
• Bank debt. Part of the price is funded by a bank secured on the business itself. The bank runs its own analysis and usually comes in late in the process.
• Vendor loan or deferred price. It is common to be asked to finance part of the price yourself and collect it over the following years.
• Earn-out. A slice of the price is tied to future results you will no longer control.

The practical translation is simple: in a search fund offer, the headline price and the money you receive on completion day are usually two different numbers. Always ask what is paid at closing, with whose money, and what depends on the business continuing to perform.

What is the real risk for the seller?

The risk sits in the financing, which only closes at the end of the process.

• The financing may not arrive. The deal can collapse late, after months of due diligence, with your team already unsettled and the market aware of the process.
• Longer timetables. Investor approval and the bank's analysis are added on top of the normal timeline of a sale.
• More reliance on your handover. The buyer has no structure behind them, so they will ask for a denser transition and more presence from you after closing.
• Too much debt or too much deferred price. An offer that looks high on paper can turn into little certain cash and a lot of deferred risk.
• No direct sector experience. It affects the continuity of the business and, if there is an earn-out, your own deferred consideration.

None of these risks disqualifies a search fund. All of them are managed with information and with written conditions agreed before you grant exclusivity.

What is the real opportunity in selling to a search fund?

For many Spanish SMEs, a search fund is the buyer that would otherwise not exist.

• They buy what others will not look at. A large fund rules your company out on size before reading the teaser. The searcher studies all of it.
• They give continuity to the business and the team. No integration, no duplicated roles to cut, no relocation of the head office.
• They tend to respect the culture. The buyer needs the staff to stay, because the knowledge of the business sits with them.
• The buyer is personally committed. Their career and their own money ride on this single company, not on a portfolio of twelve.

For an owner who wants to sell and wants the name to survive, that package is worth money. It should be measured, but not confused with the price.

What should I demand from a search fund before opening the books?

Ask for this before signing a confidentiality agreement and before handing over accounts and contracts.

• Who is behind them. The names of the main investors and which deals they have backed before.
• Proof of funds or a letter of support. A document from their investors confirming the ability and the willingness to finance a purchase of this size.
• The intended financing terms. How much equity, how much debt, which bank is being spoken to and how advanced that conversation is.
• What happens if the bank says no. With no plan B, your deal depends on a third party you neither know nor control.
• A written timetable. Dates for due diligence, for the bank's commitment and for signing.
• Short, conditional exclusivity. Tied to financing milestones, not to an open-ended period.

These questions do not offend a good buyer. If they take offence, you have already learned something important.

How do I compare a search fund offer with a trade offer?

Do not compare headlines. Compare four columns for each offer.

• Total price. Including deferred amounts and earn-out, with the timetable for each payment.
• Certain cash at closing. What lands in your account on day one, with no conditions attached.
• Certainty of closing. Who already has the money available and who still has to raise it.
• What happens to the company afterwards. Integration and synergies against continuity and independence.

If the company has obvious synergies with a group in the sector, the trade buyer can pay more and close with more certainty, because they pay out of their own cash. If what you value is the business staying as it is and the team staying with it, the search fund wins on continuity. The decision should rest on price, structure, continuity and certainty of closing, not on personal rapport with the buyer.

What is the next step if a search fund has approached me?

Do not answer with information: answer with questions. Before sending a single set of accounts, ask for the investors, the proof of funds, the financing structure and the timetable. And do not negotiate with a single buyer: put the search fund on the map of candidates, but compare it with trade buyers, funds and family offices. The seller wins by keeping real options open until there is a firm written offer on the table.

At Capittal Transacciones we assess each buyer's profile and real ability to close, search funds included, as part of the confidential valuation we prepare for owners considering a sale. We are a mid-market M&A boutique advising on transactions in the approximate range of 3 to 250 million euros, with eight offices in Spain (Barcelona as head office, Madrid, Girona, Lleida, Tarragona, Palma, Zaragoza and Valencia), and we are part of the NRRO group. The partner handles every mandate personally, including the conversation about whether the buyer who called you can actually pay what they are offering.

Keep reading

• Guide: every decision you face when selling your company
• A buyer asks for exclusivity, should you grant it?
• Sell 100 % or just a stake

Screen which buyer is serious: talk to Capittal