Germany's Mittelstand
Search Funds To The Rescue

German Mittlestand companies often complain about not having successors. A new investment trend - search funds - could be the answer. Here investors support ambitious graduates who want to lead, but not necessarily found, their own business.

21.01.2017 | von Anja Müller

Workers at one of Germany's archetypal Mittelstand companies, Bergmann Automotive in Hanover. © dpa

Twenty-six-year-old Manuel Hein has always wanted to buy a company belonging to the “Mittelstand” – Germany’s catch-all term for small and medium-sized companies. While he hasn’t yet singled out an enterprise to take over, Mr. Hein is sure of one thing: He is not interested in founding his own business or working for a large corporation. Mr. Hein has previously studied mechanical engineering and production technology, worked for Mercedes Benz and earned his MBA at Columbia University in New York. His abilities, he explains, lie more in taking a great idea and making it even greater. “There are ideas like that in the Mittelstand. It’s an incredible driver of innovation,” says Mr. Hein.


In today’s tech-driven economy, where start-up moxy is lionized and company founders are placed on pedestals, managing a small or medium-sized company might seem like a modest ambition. However, Mr. Hein’s longtime goal is actually part of a larger investment trend known as search funds, which are gaining popularity in the United States. There, graduates of top business schools are pursuing investors to support them in their full-time search to purchase and manage suitable companies.

Jürgen Rilling, 48, a financial investor at Mirablau Investment Management, is helping Mr. Hein realize his dream. Along with other investors, Mr. Rilling has contributed a total of €360,000, or about $381,600, to a fund for Mr. Hein, who has been given two to three years to find a company to purchase. Should he find one, the investors will finance the purchase price in return for a 70 percent stake in the company.

Alexander Kirn (left) and Uwe Latsch of German carsharing software provider Invers. The company has doubled its sales since Mr. Kirn and search fund investors took over. Photo: Tilman Schenk

Mr. Rilling has already invested in two other young entrepreneurs searching for the right company. One of them is Alexander Kirn, 33, who has wanted to run his own company since he was in high school. But after earning an MBA at Harvard, he didn’t have “a really good idea for a start-up.” Instead, he joined up with Mr. Rilling in a search fund, and for almost three years, explored the business opportunities in the German Mittelstand. That was how he found Invers, a company based in the German town of Siegen, which develops software and technology for carsharing service providers.

Uwe Latsch, the founder of Invers, is bursting with good ideas. But he would rather develop them than make executive business decisions. Now, having teamed up with Mr. Kirn, he can once again spend his time tinkering and brainstorming while Mr. Kirn runs the company. And the partnership has proven profitable for both. Four years ago, Invers had 30 employees and an annual revenue of €5 million. Today, sales have doubled and the number of employees has risen to 70. “I wouldn’t have been able to found the company I bought, and the founder wouldn’t have been able to bring it to its current state,” Mr. Kirn boasts.

Should search funds catch on in Germany, it could solve a problem that German business owners and politicians have been struggling with for years: Finding qualified people to help run the companies of the German Mittelstand. To date, qualified candidates with international career experience and an MBA, like Mr. Kirn and Mr. Hein, have been drawn to consulting, investment banking or one of Germany’s leading blue-chip DAX firms.


According to estimates by the Institute for Mittelstand Research, there are currently some 27,000 small and medium-size companies in Germany searching for successors, with many of the original owners and founders dropping out of management due to age, sickness or death. Problem is, more than half of German company owners look for a successor exclusively within their own families, while another 17 percent of companies are managed by an employee. Only around 30 percent sell to company outsiders.

Manuel Hein, search fund hopeful

Admittedly, not all companies are attractive enough to find buyers, even those involved in search funds. For potential partners like Mr. Kern, target companies should have an average of between €10 million and €30 million in sales, but also possess potential for growth. “Highly profitable and growing strongly,” is how investor Mr. Rilling describes the criteria. However, successful businesses with good future prospects often aren’t looking to sell. It’s a dynamic that complicates search funds the world over.

A study conducted by Stanford University shows just how difficult it can be to establish a successful search fund. Of the 258 funds examined, almost 20 percent were shut down because prospective business owners had given up on their search. Around 50 percent of those searching buy a company within the prescribed time period. A little more than half end up holding on to the company.

Alexander Kirn’s takeover of Invers, however, appears to be developing positively. Invers had already been the global market leader when Mr. Kirn took the reigns. Luckily, company founder Mr. Latsch had long understood the dangers of becoming stagnant. “You have to grow in car sharing or you’ll become obsolete,” he said.

But not all founders think like Mr. Latsch – especially in Germany, where the sale of a company is much less commonplace than in the U.S.

Much to the chagrin of investors like Mr. Rilling, the principle of entrepreneurship through acquisition, or ETA as it is known among experts, is rarely taught at German universities. In contrast, the subject is commonplace at elite U.S. counterparts like Stanford, Harvard and the University of Chicago.

Alexander Kirn, Invers CEO

Currently, there are only four to five search funds in the entire German-speaking region – a fact Mr. Rilling attributes to the German education system and traditional career paths. While in the U.S. graduates with bachelor’s degrees first attempt to gain business experience before getting an MBA, German students go directly on to their Master’s degree before joining a company. As a result, young entrepreneurs are “highly talented but inexperienced,” according to Mr. Rilling. This means he often assumes the role of mentor.

Those interested in a search fund need both patience and perseverance. As a first step, they have to find between eight and 12 investors to ensure individual financial stakes aren’t too high. After that, the size of the budget for the search will then be determined. This should include an average of €5,000 per month for at least two years. Importantly, the search for a suitable company should be a full-time job. Alexander Kirn confesses that if he had not invested all of his energy and time into the search, he would not have found the company he owns today.

Mr. Rilling believes that search funds have a future in Germany and considers himself to be a kind of unofficial spokesperson for what he hopes will become a movement. For him, entrepreneurship through acquisition is no less deserving of credit than founding a company. “ETA first retains jobs and then eventually builds up more,” he says.  The alternative, he warns, will be higher unemployment and the slowing down of one of the main drivers of the German economy, the Mittelstand.


Anja Müller covers small, mid-sized and family-run companies for Handelsblatt. To contact the author: mueller@handelsblatt.com



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