The opinions expressed by Entrepreneur authors are their very own.
“Less sizzle, more steak.”
I love this concise but thorough description of entrepreneurship through acquisitions (ETA) by a professor at Northwestern Kellogg School of Management.
While it will not be as exciting as life in a startup (sizzle), buying an already established and solvent company and running it your way (steak) is still entrepreneurship – it’s just a different, often less dangerous way to get there.
ETA is gaining momentum thanks to the baby boom generation. With greater than half of American businesses — 52% — belong to people aged 55 or older, many of them want to sell their firms and retire into the sunset. If you add the lack of succession planning (e.g. no family or employees interested in taking on), this is a good time to buy.
Our industry tends to glorify one-in-a-million ideas that catch fire and make billions of dollars, forgetting that the foundation of a healthy economy is small but stable businesses. Despite the whole lot, small businesses generate 44% America’s gross domestic production (GDP).
I’m not here to dampen the enthusiasm of aspiring entrepreneurs who imagine their idea might be the next unicorn. Instead, I imagine that ETA is more likely to be a lucrative consequence and ought to be considered.
Why ETA?
Startup life is filled with stress, anxiety, long days and little sleep as you are consistently looking for latest customers and suits for your solution. Not to mention the low pay, even if you get a small infusion of capital to extend your runway a bit.
Yet countless studies show that only 10% consider themselves “successful.” Much less generates actual levels of wealth for founders.
ETA provides an easier path to success on a road already paved by others, many of whom are baby boomers. According to the U.S. Census Bureau, boomers own 2.34 million small businesses in the U.S., which employ greater than 25 million people.
As the “silver tsunami” devastates industries – the mass retirement of the baby boom generation – vast opportunities for takeovers are opening up all over the place. These firms are already proven in their industry, have an existing customer base, and normally have regular money flow.
The right person can quickly take a healthy business to the next level. Instead of expending mental and emotional energy on something that will never cross the finish line, you bring fresh legs and latest ideas to take the baton from another person.
The first step in your ETA journey
First, you need to do some research to determine what financial path you want to pursue. Will you self-fund your search and try to pay for it on your personal, or will you create a search fund that may provide the capital essential to find your organization?
Essentially, this alternative comes down to which level of freedom you value most: financial freedom in the type of a paid two-year window to find the right company, or the freedom to run your small business your way.
Search financing gives you capital to execute, including a company search fee, but you quit flexibility in terms of time, industry and location. Self-funding provides flexibility in terms of time, location and industry; the drawback is that you have to handle the money yourself.
Search for financing
As an aspiring entrepreneur, you use a search fund to assemble a team of investors to cover the costs of finding and acquiring a company.
These costs include salary and other requirements to help you find and obtain a lucrative business contract – normally with a deadline of two years. Additional financing from investors – and their networks – helps you acquire much larger firms than you could on your personal.
While you have more financial freedom in the starting by using a search fund, you need to help your investors find the best opportunities, no matter industry or geography. You also face pressure and expectations that you will grow the company for 5-7 years and then sell it.
Benefits
- Immediate access to capital and financial resources for a more comprehensive search
- Get guidance and support from experienced investors with worthwhile contacts.
- Thanks to the support of reputable investors, your credibility in the eyes of sellers immediately increases.
Challenges
- You have less capital in the company because much of it goes to investors.
- More pressure to complete a task can impair your ability to make the best decision.
- Potential conflicts with investors regarding strategy or vision during the process.
- This is a more complicated process, requiring more investors to satisfy.
Self-financing
Self-financing is exactly what it seems like: as an entrepreneur, you use your money and resources to finance the technique of finding and purchasing a business.
While not the whole lot has to come out of your personal pocket – borrowing money from family, networking, loans, etc. – the financial risk is much greater because you are essentially putting all of your chips in finding the right company.
If you find and buy your small business, you have the freedom and flexibility to run it your way. You can goal any geographic area or industry and make your small business suit your needs and desires, not investor expectations.
Benefits
- You have full ownership of the company and can make your personal decisions.
- Choose an industry and geography that suits you, not investors.
- No amount of management of stakeholder relationships and expectations simplifies this process.
- You keep all of your equity in the business and maintain higher profits and profits.
Challenges
- If you fail, you could lose a large portion of your savings.
- You have limited access to financial resources outside of loans, which can limit your options.
- All necessary decisions fall on your shoulders, without the need for advice and experience.
While the path to entrepreneurship is made a little easier through acquisition, it still requires careful navigation no matter the path you select.
But this is just the starting. I’ll be back with next steps, focusing on how to find a company and what the acquisition process should appear to be.