ETA. No, not your estimated time of arrival. We're talking about the who, what, when, where, why, and how of Entrepreneurship Through Acquisition.
Acquisition Entrepreneurship is for those business savvy individuals that want to make a meaningful impact on their community without the risk and work of starting a new business. The business skills and personality traits required to be successful include: confidence, managerial and leadership qualities, persuasiveness, perseverance, tolerance for stress and rejection, understanding of finance, decision-making, and passion for learning.
Entrepreneurship through acquisition and small businesses go hand-in-hand because most small businesses are in need of ownership transition. More than 40% of these small businesses are owned by baby boomers and according to a recent survey done by Wilmington Trust, nearly 60% of baby boomer business owners do not have a management succession plan. Enter ETA.
…If you're a baby boomer that doesn't have a plan, click here.
Entrepreneur / äntrəprəˈnər,ˌäntrəprəˈno͝o(ə)r/
"one who organizes, manages, and assumes the risks of a business or enterprise"
Acquisition / akwəˈziSH(ə)n/
1. "the act of acquiring something"
2. "something or someone acquired or gained"
Thank you Merriam-Webster dictionary...
In summary, acquisition entrepreneurs apply their business smarts to buying, running, and growing an existing business rather than creating a start-up or dedicating decades to climbing the corporate ladder.
Entrepreneurship through acquisition tends to be pursued later in an individual's professional life, after they have gained operational experience and created a vast network of professional and personal connections. Arguably, the case can be made that at any time in your life, ETA can be pursued. Recent MBA graduates, ambitious millennials, career transplants, and stay-at-home parents can all develop a knack for acquisition entrepreneurship; they will just be at starting at a disadvantage.
The overall time commitment for ETAs can be anywhere from six months to two years beginning with that initial search into new opportunities, to finally striking a deal and taking over leadership.
Commencing a modus ponens...
ETA and small businesses go hand-in-hand. In 2020, the number of small businesses in the U.S. reached 31.7 million, making up 99.9% of U.S. businesses. Therefore, ETA is a major demographic trend in the United States.
Minnesota alone has almost 500,000 small businesses.
With that many acquisition prospects, an ETA searcher has specific elements to look for in each business, in order to focus their limited time and resources.
The search includes finding and vetting potential acquisition prospects, raising funds from investors, negotiating with sellers, and eventually closing the sale at a reasonable price.
The entrepreneurship through acquisition search process is dependent upon three factors: business characteristics, target industry, and geography. According to small business private equity firm, Hadley Capital, the ideal acquisition characteristics to keep your eye on are:
- A minimum of 10-Year Operating History
- ~$1.5m to ~$15m in Annual Revenue
- A minimum 15-20% EBITDA margin
- Outstanding Reputation and Brand
- Loyal Customers
- Pricing and Location Advantage
In addition to those criteria, ask yourself the following questions provided by the Harvard Business Review to filter out the bad apples.
- Is it profitable?
- Is it an established business?
- Are its revenues and cash flows in the desired range?
- Do you have the skills to manage it?
- Does it suit your lifestyle (location, hours, need for travel, and so on)?
- How enduringly profitable is the business?
- Is the owner serious about selling it?
The search process will look different for each individual, and each comes with different costs - searcher salaries, office leases, travel expenses - that can be covered through five different methods.
1. Self-funded Search: Also known as the "fundless sponsor", the self-fended search puts all cost responsibility on the entrepreneur whether that be through personal funding, investor capital, seller financing, bank financing, or a combination of all. Of all of the methods, this is the most common search model.
3. Traditional Search Fund: Capital through this model is raised from investors who get "preferred equity in the acquisition equal to 1.5x their investment" and "first refusal to invest additional capital in the acquisition". Read "Defining Industry Boundaries for a Search Fund" by Tom Matlack and use Search Fund to gain insight into how to find valuable investors.
4. Sponsored Search: Sponsored search involves the searcher or entrepreneur partnering up with an investment firm. The investment firm is the controlling shareholder because they cover a majority of both the search and the final acquisition costs and will also control the Board of Directors.
5. Incubated Search: While similar to the sponsored search, incubated search differs in that the entrepreneur is not alone in their search, and benefits from shared support and infrastructure with other searchers, including a large database of all potential acquisition targets.
It is important to remember that despite all the time and money that goes into acquisition searching, not every search will end in a successful purchase. In fact, according to Harvard Business Review, only about 75% do.
Despite the challenges of ETA, the business of it is personally, professionally, and financially rewarding.
Instead of searching for a job, you are creating one. Your ability to take advantage of resources, find and fill holes in the market, and creatively run your company allows you to generate value for yourself and for the marketplace.
"In simple economic terms, healthy demand for management transition and ownership succession is met with a supply of capital and talent." The capital necessary to acquire a small business is also lower than trying to start a business from the ground up.
You'll also have a more flexible lifestyle than would be possible in a large firm or start-up- meaning the weeknights and weekends are yours. Done are the missed happy hours and missed Minnesota Twins games. Instead of wasting away in a 5 sq. ft. cubicle, or acting on behalf of someone else's whims, you are immediately in charge of an organization and making the decisions- which can be scary and not without consequences. Instead of the worker bee, you've become the queen.
If you're looking for more of a deep dive into Entrepreneurship through Acquisition, read here, purchase Richard S. Ruback and Royce Yudkoff's book, HBR Guide to Buying a Small Business, from your local bookstore, or listen to one of Flagship's recommended podcasts for entrepreneurs.