"Search funds encourage sustainable business succession"
Rather than relying on family succession, the model of transferring a company to an external entrepreneur-operator, with a search fund, is gaining ground in Switzerland. Robin Goldhagen, Head Investor Relations at Novastone Capital Advisors, explains the principles behind this approach.
In Switzerland, nearly 60% of businesses are passed on within the owning family, but that proportion is declining. The reasons include the demographic weight of the baby boomer generation and the life choices of their heirs, who sometimes pursue different careers. Succession also becomes more complicated when several children are involved. As a result, more and more business owners are turning to external solutions, such as a takeover by an entrepreneur-operator via a search fund. Robin Goldhagen, Head Investor Relations at the Zug-based company Novastone Capital Advisors, outlines the principles of this emerging succession model.
How does a management buyout via a search fund differ from other succession models?
Robin Goldhagen: As a search fund program, we operate in the opposite way to traditional investment funds, which first identify a target company and then recruit a manager. We select experienced profiles, mid-career executives with fifteen to twenty years of operational experience (“operators”), who want to acquire and run an SME. Each year, we receive around 3,000 applications and select about twenty candidates. We then support these individuals in their search for a company until the takeover is complete.
What are the main stages of such a project?
Goldhagen: First, there is the search phase conducted by the aspiring executive, which can last up to two years. This stage is financed by our network of investors, made up of family offices and wealthy individuals interested in gaining direct exposure to entrepreneurship. When an acquisition is completed (in approximately 50% to 55% of cases), these investors can either exit with a capital gain or reinvest in the transaction. The acquisition is then financed through a mix of funding sources, for example, half by a bank and half by investors. Following the takeover, the operator is appointed CEO and commits to leading the company over the medium to long term.
What are the characteristics of an attractive company for a search fund?
Goldhagen: We target owner-managed family businesses with earnings before interest, taxes, depreciation and amortization (EBITDA) of between CHF 2 million and CHF 7 million. Ideally, the companies operate in traditional B2B sectors such as services, industry or logistics, which form part of the “old economy”, the backbone of the Swiss economy. We look for businesses with solid and predictable business models, ideally with recurring revenue streams such as services or subscriptions. A strong position in a niche market is also an advantage, as are low cyclicality and a certain resilience to technological change. Since our founding, we have completed 27 acquisitions, representing around CHF 400 million invested.
What are the advantages of this model for the seller?
Goldhagen: First, there is the direct relationship with the future leader from the very beginning of the succession process. Unlike a sale to a strategic buyer or a private equity fund, this model helps limit concerns related to restructurings or abrupt changes. It creates a highly personal relationship, often described as “the son or daughter I never had.”
In principle, the buyers come from the same country, sometimes even the same region, which strengthens trust. The seller may also remain a minority shareholder, holding between 10% and 20%, which contributes to continuity. It is true that a purely financial investor can sometimes offer a higher price, but with fewer guarantees regarding the long-term sustainability of the project. A search fund encourages sustainable succession, with a good balance between price and continuity.
What are the prospects for this form of succession in Switzerland?
Goldhagen: The search fund model has experienced exponential growth in recent years, particularly because of demographic developments. It is also attracting growing interest in universities. Fifteen years ago, students mainly dreamed of launching start-ups. Today, many view search funds as an alternative route into entrepreneurship later in their professional lives. However, with this growing enthusiasm, only the strongest profiles succeed in standing out.
What advice would you give to someone interested in this model?
Goldhagen: First, people need to think carefully about their ability to take responsibility for a company and its employees. They also need to demonstrate considerable resilience. The search phase is long, demanding and filled with rejection. In that respect, it is essential to activate one’s network and rely on a strong ecosystem, particularly by engaging with other entrepreneurs.
And for a business owner considering transferring their company?
Goldhagen: The first step is deciding to sell, which is not an easy decision. It is then crucial to surround yourself with professionals such as advisors, lawyers or accountants. This provides a realistic view of the company’s value and helps structure the process. A business transfer is, in principle, a once-in-a-lifetime experience. Being well supported helps make it smoother and more reassuring.
