In recent years, the Search Fund investment model has gained relevance in Spain as an attractive alternative for entrepreneurs and investors. A Search Fund is an investment vehicle that enables an entrepreneur, backed by investors, to identify, acquire, manage and grow an established company.
Unlike traditional venture capital which focuses primarily on start-ups and innovative projects, Search Funds target companies with proven business models, positive cash flow and operational improvement potential. Originating in the U.S. in the 1980s, this model allows entrepreneurs to raise capital to acquire and lead an existing business, permitting investors to participate in its growth and value appreciation over the medium and long term.
Below, we examine the key legal aspects and advantages of this investment strategy in Spain.
Legal Aspects
From a regulatory point of view, Search Funds in Spain lack a specific legal framework and are usually structured through conventional investment vehicles. Entrepreneurs usually set up a limited liability company (S.L.) or a public limited company (S.A.) to channel investor participation.
At the contractual level, the relationship between the entrepreneur and the investors is formalized through a shareholders’ agreement that defines rights and obligations, including governance structures, exit mechanisms and profit-sharing clauses. Ensuring alignment of incentives between both parties is essential for a balanced and effective partnership.
The acquisition of the target company must comply with commercial and competition laws, necessitating rigorous due diligence to assess legal, tax and labour risks. In some cases, it will be necessary to obtain regulatory approvals, particularly if the company operates in strategic sectors. Engaging specialized commercial law advisors is crucial to ensure compliance and mitigate potential risks.
Financing the acquisition can involve bank debt, private equity or a combination of both. Designing an optimal financing strategy is essential to project sustainability, avoiding excessive leverage that could jeopardize the acquired company’s viability. In addition, a well-defined transition plan is crucial to ensure a smooth managerial takeover and minimize operational disruption.
Benefits for Investors
- Risk diversification: Unlike start-ups, companies acquired through Search Funds generally have established business models, reducing volatility and investment risk.
- High return potential: If effectively managed, the acquired company can experience sustained growth, generating significant returns from investors.
- Active participation in the investment: Investors can contribute capital, valuable expertise, and contact networks to enhance the company’s performance.
- Flexible investment structure: Agreements between investors and entrepreneurs allow tailored participation structures that align with individual expectations.
- Lower operational risk: Established companies with predictable revenue streams and stable customer bases offer greater investment security than early-stage startups.
- Positive economic impact: This model supports business continuity and succession, preventing viable companies from closing due to generational transitions.
- Competitive acquisition opportunities: Many original owners seek an orderly transition and may offer favourable sale terms. With operational improvement and expansion strategies, the acquired company’s value can increase substantially, delivering attractive investor returns.
Conclusion
Combining a flexible legal framework with compelling investor advantages, Search Funds represent an innovative investment alternative in Spain. However, their success hinges on rigorous strategic planning, thorough due diligence and efficient execution in the acquisition and management phases.
In an evolving investment landscape, Search Funds are gaining traction as a relevant vehicle for financing corporate acquisitions.
The entrepreneur-investor plays a crucial in ensuring success, requiring a clear vision, strong management capabilities, and a well-defined growth strategy. When executed, this model generates value for investors and strengthens the broader business ecosystem in Spain.
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