The 10 Reasons Why Search Funds May Not Be for You

Search funds have gained popularity in the US and are in recent years gaining popularity in Europe as a unique way for aspiring entrepreneurs to acquire and run small to mid-sized businesses. While this model offers exciting opportunities, it’s important to consider that it’s not for everyone. Below are ten reasons why the search fund model might not be the best fit for some individuals, especially in the European context.

1. Moving Away from Cool Cities

Many successful search fund acquisitions are based in smaller, less cosmopolitan areas. In Europe, the most attractive businesses for searchers are often located outside of major hubs like London, Paris, or Berlin. If you’re attached to the energy and lifestyle of large, vibrant cities, relocating to a quieter, more rural area may feel like a step back.

2. Working in Unsexy Industries

The most promising companies for acquisition are often in traditional or “unsexy” industries—think manufacturing, logistics, or niche services. If you’re hoping for a career in glamorous, high-growth tech sectors or consumer-facing startups, the typical search fund target might not align with your aspirations.

3. The Mittelstand: A Lot of HR Management

In Europe, particularly in countries like Germany, many search funds target Mittelstand companies—small to medium-sized, family-owned enterprises. Running these businesses often requires heavy involvement in human resources and people management, which can be time-consuming and complex. This includes navigating employee relations, hiring, firing, and maintaining a strong culture within the company, all of which may not appeal to every entrepreneur.

4. Employee Mindset May Not Be as Ambitious

Mittelstand companies tend to have loyal, long-serving employees who are accustomed to slower growth and traditional ways of doing business. As a search fund operator, you may face cultural resistance if you're looking to drive rapid change, implement new technologies, or scale aggressively. The workforce might not share the same hunger for innovation or growth as employees in other sectors, making transformation challenging.

5. Long Hours, with No Immediate Financial Upside

The search fund model involves a period of intense searching for a suitable acquisition, which can last up to two years. During this time, you’re essentially working without a guaranteed salary, as your compensation will largely be tied to the success of the acquisition. If you value immediate financial security or work-life balance, this model may not be for you.

6. Limited Industry Choices

While the search fund model is designed to identify high-potential businesses, the sectors available for acquisition may be limited. The pool of companies in Europe that meet the search fund criteria—stable cash flows, established customer bases, and scalability potential—is not as large as in the U.S. This means you might have to settle for industries that don’t particularly excite you.

7. Regulatory Hurdles

Europe’s regulatory environment can be complex, especially when dealing with smaller companies. Labor laws, environmental regulations, and tax policies vary significantly from country to country, and navigating these as a new owner can be daunting. This can add unforeseen complications and costs to managing your newly acquired business.

8. Cultural Barriers in Business Ownership

In many European countries, small and family-owned businesses have long-standing traditions and relationships. As a new, often younger owner from outside the region or even the industry, you may struggle to gain the trust of employees, customers, and suppliers. Overcoming these cultural barriers can take time and significant effort, particularly in countries with strong family business ties.

9. Heavy Operational Focus

Owning a small to medium-sized business in Europe requires hands-on operational involvement. Unlike in larger companies where strategic leadership is the primary focus, running a search fund-acquired business involves daily problem-solving, managing teams, and keeping an eye on operational efficiency. If you're more interested in high-level strategy, this may feel too tactical and draining.

10. Risk of Plateaued Growth

Many European businesses, particularly in the Mittelstand, have already reached a point of stability and plateaued growth. While they are profitable, their growth potential may be limited. For entrepreneurs with ambitions to rapidly scale a company, this can be frustrating. Expanding internationally or introducing new product lines might be challenging due to the conservative nature of the existing business model.

Conclusion

The search fund model offers unique opportunities for entrepreneurial leadership and value creation. However, it’s not without its challenges, particularly in the European market. From geographic limitations to the complexities of managing long-standing family businesses, potential searchers should carefully weigh the pros and cons before diving in. Understanding the realities of the model—especially in a European context—can help ensure that you make an informed decision about whether it aligns with your personal and professional goals.