The rise of acquisition entrepreneurship: a third path

Over the past few years, there has been skyrocketing interest in Americans pursuing a third career path: one that does not involve starting a business or working for someone else’s. That path is commonly referred to as entrepreneurship through acquisition (ETA) – the process of becoming an entrepreneur through buying an existing business.

Buying a business vs. building a business

Acquisition entrepreneurship involves buying instead of building a startup business. Instead of spending years going from 0 to 1, more and more Americans are buying existing businesses. As a number of relatively recent books have pointed out, there are a number of distinct advantages from buying vs. building.

Why is entrepreneurship through acquisition becoming so popular?

Interest in entrepreneurship through acquisition has skyrocketed in recent years. Although the idea of buying a business as a career path stretches back to the 80s, when a Stanford professor first popularized the idea of a traditional search fund, it has only been the past 5-7 years when it has come into vogue.

This can be seen across the internet and even on university campuses. Twitter personalities like Clint Fiore (a business broker in Texas), Michael Girdley (an SMB buyer in Texas), and Brent Beshore (a business buyer in the Midwest) boast hundreds of thousands of followers. There are conferences like SMBash and HoldCoConf. MBA programs almost all offer courses and/or clubs on ETA (see business school programs at MIT, UVA, Rice).

The cause of this surge is due to two converging factors. First, there are now accessible resources around how to buy a business. Just a decade ago, there was little written on the topic. As of 2023, there are a number of books that provide a roadmap for buying a business. Additionally, there are dozens of online courses and communities for business buyers. Second, there is a growing sense of disillusion with Corporate America. Part of this was accelerated by COVID-19, when so many people were locked in their apartments cranking away at seemingly meaningless work with little freedom and ownership.

Entrepreneurship through acquisition provides the ownership, control, and sense of freedom that comes with starting a business from scratch while also having a mechanism for buyers of small business to maintain a decent quality of life through a salary and distributions from the business.

Despite the recent surge in popularity, ETA has been a path for decades

Although many may consider ETA a new career path, buying a business as a means of becoming an entrepreneur has been done by some of the most well known business leaders.

Warren Buffett bought his first business. Elon Musk came to own Tesla by buying it from the original founders. Steve Jobs bought part of Lucasfilm and turned it into Pixar.

As evidenced by these examples, there are a number of different reasons that may drive someone to buy over build. For these individuals, they didn’t choose to buy due to lifestyle concerns. They chose to buy because the business had something that they couldn’t easily recreate in a short time frame: recurring, stable cashflows; top talent; strong customer relationships.

What makes a good acquisition entrepreneur?

Acquisition entrepreneurs come from a variety of backgrounds. Some are exiting the armed forces and looking to apply their leadership skills in the civilian domain. Others are disillusioned working in finance or operations at a large corporation and wanting to apply those skills to a small business. Still others may have spent a decade as an employee in the field and want to move into the owner’s seat in the same industry.

Across all of these backgrounds, there are some key characteristics that the best acquisition entrepreneurs share:

• Financial Management: Few are financial wizards, but all have a basic understanding of financial concepts and have demonstrated the ability to manage their personal finances through a good credit score and no bankruptcies. This track record gives the selling owner, lenders and investors confidence in trusting them.

• Quick Learner: No one is expected to already have the knowledge to find and close on a business acquisition. But, the journey to buy a business involves wearing a lot of hats as well as learning about a lot of different concepts and industries. Those that can learn quickly succeed.

• Grit: Many acquisition entrepreneurs take a year or more to find a business and close on it. Throughout the process, there are times where it’s tough – sellers are being difficult, a bank is refusing to lend, it feels like there isn’t a business that meets your criteria. Those with grit to soldier on will be rewarded, as closing day is really just the starting line.

• Decent People Skills: No one needs off the charts charisma, but a cool head and the ability to focus on the outcome and not always being “right” pays in spades. There are a lot of people and egos involved, from the seller’s attorney to old timer employees. 

Concepts involved in acquisition entrepreneurship

As a business buyer progresses along the journey from getting familiar with the space to being the successful business owner of an acquisition, there are a number of topics that will become second nature.

1. Sales & Marketing: Whether it’s identifying potential acquisition targets or pitching yourself as the ideal successor of a multigenerational business, acquisition entrepreneurs will learn the basics of sales and marketing.

2. Due Diligence: As part of kissing a lot of frogs, due diligence is the process for weeding out the good opportunities from bad. This covers market due diligence (is this a good industry?), financial due diligence (is this a strong business priced appropriately?), operational due diligence (does the business have controls and procedures in place that will let it survive an ownership transfer?), and legal due diligence (is the business in good standing?).

3. Valuation: Related to due diligence is the process of analyzing the financials to determine the right price for an offer. In small business acquisitions, the pricing is most often based on a multiple of seller’s discretionary earnings. Understanding how to determine SDE and apply a multiple that fits is key.

4. Negotiation: The purchase price is only one piece of the puzzle. Most purchase agreements are 10 pages or longer and may contain a number of exhibits or attachments. Learning about the key terms and negotiating them is part of the journey from due diligence to close.

5. Financing: Given most buyers will be using forms of debt and equity to finance their purchase, topics like DSCR, personal guarantees, and loan terms will begin to click after getting pre-qualified.

6. Operating: Buying the business is only the start. As entrepreneurs near the close date of the acquisition, many will focus on putting together a transition plan with the selling owner. The best searchers may even spend time shadowing other owners in the industry before their own deal closes.

Where should I start to buy a business?

Although it may be the “newest” career option in vogue, buying a business is not easy. It is a long process that is equal parts stressful and rewarding. Before jumping into spending your evenings on BizBuySell, here are some steps to get started:

1. Read Buy Then Build: This is still the seminal work on buying a business and lays out the journey from beginning to end.

2. Consider a Course: There are a wide variety of online courses and communities for buying a business. We offer one called Copilot but you can find many options online. 

3. Speak with a successful Acquisition Entrepreneur: There are a number of successful searchers active on the internet, from X.com (fka Twitter) to on Searchfunder.com. Reach out to some successful searchers and ask to buy them a coffee!

4. Begin Your Search: Take a look at online aggregators like BizBuySell to find businesses for sale near you. Reach out to the broker, sign the NDA, and begin reviewing the opportunity to get a sense of the typical information provided.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.