The views expressed by the business participants are their own.
“Less sizzle, more steak.”
I love this pithy but accurate explanation of entrepreneurship through acquisition (ETA) from a professor at the Northwestern Kellogg School of Management.
While it may not be as fun as the startup life (sizzle), buying an established and floundering business and running it your own way (steak) is still entrepreneurship – it’s a different, often less risky way to get there.
ETA is booming because of the baby boomer generation. With more than half of America’s businesses – 52% – owned by those 55 or older, many are looking to sell their companies and ride off into the sunset of retirement. Combine that with a lack of succession planning (eg no family or employees interested in taking over), and this is the right time to buy.
Our industry tends to glorify one million ideas that catch fire and make billions of dollars while forgetting that the backbone of a healthy economy consists of small but sustainable businesses. After all, small businesses generate 44% of America’s gross domestic product (GDP).
I’m not here to dampen the enthusiasm of aspiring entrepreneurs who believe their idea could be the next unicorn. Instead, I believe that ETA has a high potential for a profitable outcome and should be considered.
Related: 4 Models for Creating Value Through Acquisitions
Why ETA?
Startup life is full of stress, anxiety, long days and little sleep as you constantly search for new customers and the right fit for your solution. Not to mention the low salary, even when you get a small entry fee to extend your flight path for a while.
Yet countless studies show that only 10% are considered “successful.” Very few generate any real level of wealth for the founders.
ETA provides a smooth path to success on a road already paved by someone else, many of whom are part of the baby boom generation. According to the US Census Bureau, boomers own 2.34 million small businesses in the US, employing more than 25 million people.
As the “Silver Tsunami” sweeps through the industry — the mass retirement of baby boomers — there are plenty of opportunities to find things across the board. These businesses are already proven in their industry, have an existing customer base and stable cash flow.
The right person can quickly take a healthy business to the next level. Instead of wasting mental and emotional energy on something that may never finish the line, you bring new legs and new ideas to carry the baton for someone else.
The first step in your ETA journey
To begin, you need to research to find out what financial path you want to follow. Are you going to fund your search yourself and try to pay your own way, or are you going to build a search fund to provide the money needed to help you get your business off the ground?
Essentially, this choice comes down to what level of freedom you value most: the financial freedom of a two-year pay window to find the right business or the freedom to run your business your way.
Search financing gives you potential income, including a stipend to look after the business, but gives you flexibility in time, industry and location. Self-financing offers flexibility in time, place and industry; The downside is that you have to come up with the money yourself.
Related: How Leaders Can Build Acquisition-Ready Companies
Search for funding
As a budding entrepreneur, you use a search fund to assemble a team of investors to cover the costs of acquiring and acquiring a business.
These costs include salary and other requirements to ensure you can find and secure a lucrative business deal – usually with a two-year death date. Additional funding from investors – and their networks – helps you find bigger companies than you could find on your own.
While you have more financial freedom early on, using a search fund, you should help your investors find the best opportunities regardless of industry and location. You also face the pressure and expectation of growing the business for 5-7 years and then selling it.
Benefits
- Quick access to financial and financial resources for a comprehensive search
- Get guidance and support from experienced investors with valuable connections.
- With the support of reputable investors, your credibility is quickly improved by sellers.
Challenges
- You have little equity in the company as the majority goes to your investors.
- Too much pressure to deliver may interfere with your ability to make the best decision.
- Potential conflicts with investors in strategy or opinion during the process.
- It’s a very complicated process that many investors can’t satisfy.
Self financing
Self-financing is exactly what it sounds like: as an entrepreneur, you use your own money and resources to support the process of finding and buying a business.
Although not everything should come out of your pocket – borrowing money from family, network, debts, etc. – financial risk is very important as you put all your chips on your ability to find the right company.
When you find and buy your own business, you have the freedom and flexibility to run it your way. You can target any areas or industries you want and tailor the company to your needs or desires rather than investors’ expectations.
Related: Why You Should Do Everything You Can to Self-Fund Your Business
Benefits
- You have full ownership of the business and can make your own decisions.
- Choose an industry and place of work rather than investors.
- There is no managing stakeholder relationships or expectations which makes the process easier.
- You maintain perfect equity in the business and maintain high returns and profits.
Challenges
- You can lose a large part of your savings if it fails.
- Reduced access to financial services other than loans, which may limit your scope.
- All important decisions fall squarely on your shoulders, with little advice or knowledge to take away.
Although the road to entrepreneurship is a little smoother with shopping, it still needs to be navigated carefully, no matter which path you choose.
This is just the beginning, however. I’ll be back with tips on your next steps, focusing on how to acquire a business and what the acquisition process should look like.
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