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Becoming an Entrepreneur Through Acquisition


If you want to become an entrepreneur but don't know where to start, don't fret - you are not alone. Most people associate being an entrepreneur with starting a business from scratch. Starting from scratch, however, presents a wide range of risks. Most notably: building a brand, establishing relationships with various stakeholders, forming an effective team and above all else, generating cash flow!

What is Entrepreneurship Through Acquisition?

Entrepreneurship through acquisition (ETA) is a term used describe the process of buying an existing business, taking it over, and running it as CEO. This method of becoming a CEO is profoundly different from the startup grind and climbing the corporate ladder within a company. It allows you, the entrepreneur, the opportunity to become CEO and owner of an existing business immediately.

In the coming years, predominantly due to the impending retirement of the baby boomer generation, millions of quality private businesses will be up for sale and go through an ownership transition. In fact, about 4,000,000 privately held businesses stand to change hands in the next decade. Of this total, 75% of these owners do not have an exit plan in place¹. The time is now to take control of your professional life, begin making impactful decisions, and directly tie your work to the financial rewards you stand to earn.

Let's talk about what this looks like.

Related: Entrepreneurship: No Experience Necessary

What Sort of Business Should I Buy?

One common misconception is that investing in private companies means you’re putting your money into a smaller pool. That is simply not the case. In fact, private businesses employ as many people in the U.S. as public companies.

For MBA-level ETAs, it is common to target businesses in the EBITDA range of $750K-$2M. The reason being that most firms smaller than that won't really allow you to exercise the advanced leadership and management skills acquired during your MBA education. Conversely, anything a lot bigger will generally perk the ears of private equity groups and investment banks - which can ultimately price the business out of reach.

Why Should I Buy a Private Business?

Depending on the source, the approximate average return of the stock market after inflation for the past 75 years has been around 7%. Unless you have a portfolio of stocks that regularly pay dividends, chances are you haven’t seen your money since you invested it. There is nothing wrong with that since it is growing in value; however, buying into the private market vis-a-vis an established, private business can give you the best of both worlds - increasing value as well as cash flow. The stable growth of the value of a business coupled with cash flow in the form of wages and/or dividends can be a phenomenal combination. When buying into the private market, it is not uncommon to see a 25% return without any additional growth- i.e. simply taking over where the previous owner left off.  

Related: Buying a Business Over Starting From Scratch

In addition, buying a business that is already running means that it is revenue positive on day one! No heavy start up costs, no customer list building, etc. Just operate and grow. This method is so very much under-appreciated, but yet some people have seen the opportunity and jumped on it.

There are many businesses for sale today that have stood the test of time, while delivering consistent returns to their stakeholders- as alluded to earlier, quite often yielding a return on investment in excess of 25% per annum. Using the rule of 72 (a method in which you divide 72 by the rate of return to see how long it will take your investment to double) we can see that on average if you invest in the stock market, it will take over a decade to double your money. On the other hand, an investment in an ‘enduringly profitable’ business can lead to your money doubling in under three years.

Outside of the obvious financial rewards, becoming an ETA can provide some intrinsic, internal motivation as well. See below for a list of some of the many ways ETAs differ from the general workforce:
  • ETAs don’t have to succumb to the insane idiosyncrasies of management who have no good reasons for their policies other than to control them.
  • ETAs decide the value of their time, not their boss.
  • An ETA’s performance is recorded based on their customers, not upper management.
  • ETAs can surround themselves with people they want to work with.
  • ETAs are not held to a strict nine-five regiment. Rather, they decide the hours they want to put into their business.

How Do I Go About This?

Most people would agree that the benefits of becoming an ETA seem great. But they have this vision that the task of buying a business is daunting. In reality, however, it’s not as difficult as it seems. Most people are not aware of how the majority of business acquisition deals of this size are structured and that buyers actually have access to a lot of leveraging power.

Let’s layout a scenario... For easy math, let’s say a business for sale is producing $1M EBITDA per year and has a sale price of $4M (Note: most established businesses sell in the range of 3-5X EBITDA). Most people immediately think: “I can’t afford that!”

However, if you look at how most of these deals are structured, you will come to realize that the terms are actually fairly reasonable. Assuming you qualify for a SBA loan, a bank can generally lend you about half (or more) of the purchase price. The remaining half can usually be split by way of seller financing - a situation where the seller covers the upfront costs and you slowly pay back them back over time. So what’s left is $1M. This last portion can be raised through your network: family, friends, people you’ve worked for, etc. Remember, this business is creating $1M cash each year - this makes for a fairly attractive pitch to investors.

Of course, this same structuring can apply to smaller deals as well.

Related: Buying a Business? Here’s How to Stand Out to Any Seller

What About My Lack of Experience?

Real world business decisions can be a lot different from a textbook or a case study. However, it is important to note that all business owners were first time owners at some point.

Much of the business’s functions: how to sell, how to be present, how to manage people, etc., can be learned through taking that leap, being a sponge, and learning all you can about the business. In addition, the vast majority of deals are structured in a way where the seller will stay on board for a set period of time (generally 3-6 months) to aid in the transition process. This is a time where the ETA will learn the current processes, understand the company’s positioning, and be introduced to the various stakeholders. Oftentimes, the seller will actually fill a part-time advisory role well past the transitioning period.    

The Decision

Becoming an ETA is not for everyone. Making the decision truly comes down to what you value. If you enjoy the consistency and reliability that comes with receiving a paycheck every two weeks, then becoming an ETA probably isn’t for you. If you don’t like situations where there is no ‘right decision’ and no direction, then becoming an ETA probably isn’t for you. If you value attaching a known brand to your professional role- ex: “I work at Microsoft”- and having a large social net at work, then becoming an ETA probably isn’t for you.

On the other hand, if you desire professional independence, want to help the community, like calling the shots, and are attracted to directly tying your financial rewards to your work effort, then you should really consider becoming an ETA. Thousands of acquisition opportunities come to market each year and making said purchase can be one of the best decisions you make in your professional life.

¹ Harvard Business Review