Why M&A advisors look down on SFs: a complicated relationship

The other day, I read for the umpteenth time a LinkedIn post by a Spanish M&A advisor I respect, criticizing “Search Funds”, claiming they should always be the last option to consider, only after trying with strategics or PE firms.

The criticism, as usual, is a mix of structural, economic, and cultural reasons, but in my view it mostly reflects a lack of understanding of the model and how the SF landscape has evolved and matured over the past 3–4 years.

The most common criticisms are always the same, as they are viewed as uncertain buyers, who consume a lot of time for deals that may never close (at the end of the day, most of M&A advisors are only interested in selling a company for the biggest price, as its fees depends on it):

• Slow-moving and take a long time to make decisions
• Overly selective, looking for the perfect bride
• Don’t understand valuation realities (want to buy at 3x-6x EBITDA)
• Require more guidance due to their lack of expertise (1^st time buyer, lacking sector knowledge…)
• Underestimate deal complexity (financial reporting may be imperfect in lower deals) and that sellers want speed
• Have limited operating experience
• Focus heavily on customer concentration risks and revenue recurrence
• Ask for extensive information, request deep access to data early
• Highly dependent on investor approval (and long period extension to complete a potential equity gap)
• Aggressive negotiation during DD (challenge EBITDA adjustments, renegotiate price)
• Request huge amount of seller financing or earn-outs linked to future performance
• Fail to close transactions after long processes (DD, financing…)
• Abandon the deal if a greater opportunity shows up
• Etc.

Basically, that’s why many advisors think that working with a SF means investing time in a buyer with a lower probability of closing than an established PE firm or strategic acquirer.

Furthermore, as the SF ecosystem has grown rapidly over the past years, we are starting to see too many searchers joining the market, and advisors receive countless similar outreach emails, automated sourcing messages, repetitive LOIs and that creates fatigue and the perception that they are too many competing for the same kind of company, without any criteria of differentiation (boring companies, €1-5M Ebitda, recurring revenue, no concentration of customers, no churn, no capex, a great team that doesn’t depend on the owner…), and that’s why they tend to avoid working with them.

There is also often a complaint regarding the cultural mismatch, as they view searchers as first-time CEOs, overly academic and freshly out of their MBA, excessively analytical with a lack of real-world operating experience (which can create problems when they sit him down with their client, generally a founder who has built his business over decades and don’t want to sell to a young inexperienced operator).

That said, a lot of M&A brokers work with searchers because they are also credible buyers who close deals! At the end of the day, more than 100 transactions were completed last year by traditional SFs, not counting thousands of “repreneurs”, self-funded searchers, long-term holdings, etc.

And many sellers like searchers as they see them as “the son they don’t have”, professionals highly focused and motivated, long-term oriented, culturally sensitive with employees and preserving the legacy of the company. And most of them don’t want to be involved in a deal with PE firms, or sell their baby to competitors. In many cases, they prefer a more personal succession solution and a stronger cultural fit.

That’s why the relationship between M&A brokers and searchers is a mix of friction and mutual dependence. And as I mentioned before, the ecosystem has matured significantly, and the profile of searchers has also evolved. Nowadays, it’s not uncommon to see “senior profiles”, ex-CEOs, M&A experts targeting build-ups through a SF vehicle, etc.

So the core issue is usually not so ideological. It’s mostly about incentives: advisors value certainty and speed (they want their fees and don’t work to spend too much time on a very small transaction), while SFs often bring deep analysis but less certainty of closing. Principio del formulario

However, despite these frustrations, advisors continue to work with SFs because they represent a growing and reliable source of demand in the lower middle market.

The relationship could be improved through better alignment of expectations and more professionalism on both sides. SFs can improve their reputation by communicating more clearly, moving faster when possible, demonstrating financial credibility early, and being transparent about decision-making constraints. Advisors, on the other hand, could better understand the SF model and recognize that searchers are long-term owner-operators rather than purely financial buyers.

At the end, it’s a distinct buyer category with different strengths, incentives, and timelines. But advisors should keep in mind that many searchers started with a very small company, but more and more are acquiring multiple targets during their operating phase, and in the end, we are now seeing searchers exiting their company with an EBITDA of more than €10M, and curiously, most of these advisors who first criticized the model, are now competing to win a sell-side mandate! 😉