This paper (Part I y Part II), published by Jan Simon (Professor in the practice of management in entrepreneurship at IESE Business School and a managing partner at Vonzeo Capital Partners) analyzes common reasons why SF investments fail after acquisition and proposes remedies. It focuses on five main causes: (1) continued involvement of the seller (vendor), (2) leadership failures at both the CEO and board levels, (3) customer concentration, (4) market disruption, and (5) government involvement, and proposes practical remedies for each. It builds on earlier research from IESE’s International Search Fund Center and discussions with investors.
1. Continuing role of the vendor
A frequent source of value destruction is the ongoing involvement of the seller after the acquisition. Because search fund deals are often built on strong personal relationships, sellers may remain engaged as operators, board members, or investors. While initially helpful for continuity and knowledge transfer, their continued presence can create conflicts due to emotional attachment, grief from losing control, and ego-related tensions. This may undermine the new CEO’s authority and strategic direction.
Remedies:
- Limiting or clearly defining the seller’s post-sale role.
- Avoiding operational or voting board roles when possible.
- Using advisory or consulting arrangements with defined time limits.
- Including governance mechanisms (e.g., removal clauses or buyout options) to manage future conflicts.
2. Leadership failure
Leadership issues are another major cause of failure and can arise at two levels:
a) CEO-level failure
SF CEOs are often inexperienced operators. Success requires transforming from a collaborative “Diplomat” style to an execution-focused “Achiever” who can make tough decisions, build strong teams, and drive performance. Failure occurs when CEOs lack coachability, skills, humility, or commitment, leading to poor execution and loss of stakeholder confidence.
Remedies:
- Structured mentorship from experienced board members.
- Executive coaching.
- CEO replacement if performance issues persist and the CEO is not coachable.
b) Board-level failure
Boards also play a critical governance and mentoring role. Failures occur when boards misunderstand fiduciary duties, fail to set clear objectives, become too close to the CEO, or interfere in operational execution. Weak boards can misdiagnose problems and delay necessary actions.
Remedies:
- Strong shareholder engagement to monitor board effectiveness.
- Replacing underperforming board members or restructuring the board when necessary.
3. Customer concentration
Customer concentration is a frequent source of risk in SF failures. When a small number of clients represent a large share of revenue, losing one can severely damage the business.
However, the issue is more subtle than simply looking at the percentage of revenue from top customers. The key concept is correlation:
- If customers operate in the same industry or are affected by the same economic forces, their revenues may move together.
- True diversification reduces risk only when customers are lowly correlated.
Interestingly, many successful search fund acquisitions also had customer concentration at entry, meaning concentration alone is not fatal if properly managed.
Remedies:
- Renew or extend contracts during acquisition.
- Move from one-off sales to recurring or repeat revenue models.
- Increase product differentiation.
- Build a customer base across sectors with low correlation.
4. Market disruption
Disruption is a permanent feature of capitalism (“creative destruction,” as described by Schumpeter). Even large, successful companies can fail when disruptive technologies emerge.
Following Clayton Christensen’s theory, disruption often starts with an inferior product that improves over time. Established companies fail because:
- They listen only to current customers.
- They underestimate the speed of improvement of new technologies.
- They react too late.
Remedies:
There are three main strategic responses:
- Avoidance: During due diligence, avoid industries likely to be disrupted.
- Initiation: Actively disrupt the market (e.g., digitalization, AI integration, recurring models).
- Strategic shift: Reorient the company toward a new business model (example: Asurion pivoting from roadside assistance to device insurance).
However, successful strategic disruption is rare and difficult.
5. Government Involvement
Government intervention can significantly affect SMEs through:
- Price ceilings
- Subsidies (and their removal)
- Taxes and tariffs
These interventions directly affect cash flow, margins, and valuation.
While governments can create value in regulated sectors (e.g., healthcare), unexpected policy changes can destroy value. With rising public debt, political polarization, and populism, government risk is increasing.
Remedies:
a/ During due diligence:
- Assess government risk as part of external risk.
- Use a risk matrix (impact vs. likelihood).
- Pay special attention to low-likelihood, high-impact risks.
- Consider political catalysts such as elections or budget deficits.
b/ During crisis:
If unexpected intervention occurs:
- Focus on liquidity and capital structure.
- Maintain strong communication.
- Engage closely with the board.
- Control costs and secure supply chains.
- Show strong leadership and maintain morale.
The board should try to reposition the company so that government-related risks become low-impact over time.
Conclusion
Across both parts of the note, five recurring causes of SF failure are identified: excessive seller involvement, ineffective leadership, customer concentration, market disruption and government intervention.
Failures often result from a combination of factors. While no remedy is universal, the proposed practices are based on real-world experience and aim to reduce value destruction and improve long-term outcomes. Preventive governance structures, clear role definitions, strong mentorship, and active shareholder oversight are essential to mitigate these risks and improve outcomes.
Read the full study (Part I and II):
