Every day new startups launch with 90% failing within a few years time. That can be a very discouraging prospect for many aspiring entrepreneurs.<\/p>\n
An alternative path to entrepreneurship has gained a lot of attention in recent years: entrepreneurship through acquisition. It promises a way to own and run a company, free of the cold start problem and risks associated with starting a new business from scratch.<\/p>\n
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But for whom is this the right model and how can someone go about becoming an acquisition entrepreneur?<\/p>\n
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This guide answers everything about how to get started in ETA, picking the right acquisition target, attracting the right deal flow and financing a purchase.<\/p>\n
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Entrepreneurship through acquisition, commonly shortened to ETA, refers to the path of buying and growing a small business as a means of becoming an entrepreneur.<\/p>\n
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As opposed to building a startup from nothing, acquisition entrepreneurs simply buy an existing business with product-market fit.<\/p>\n
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The main benefit<\/strong> is one of risk. Established small businesses, while still not the safest asset class, are by far less risky to run compared to starting a new company in search of market validation.<\/p>\n \u200d<\/p>\n Moreover, buying an existing business commonly means revenue is being generated, alleviating the pressure of getting first customers and iterating the business.<\/p>\n \u200d<\/p>\n Hence, an acquisition entrepreneur enjoys reduced risk and time to market with a viable product or service.<\/p>\n \u200d<\/p>\n Of course, there are also downsides<\/strong> to entrepreneurship through acquisition. For one, not everyone simply has the means to buy a business or struggles to finance an acquisition (see \u201cFinancing an acquisition\u201d).<\/p>\n \u200d<\/p>\n With potential investors involved, acquisition entrepreneurs will also not have as high of an equity stake in their business as compared to starting the business themselves.<\/p>\n \u200d<\/p>\n Acquisition entrepreneurs who raise external capital to buy a business to then run are commonly referred to as searchers, or running a search fund.<\/p>\n \u200d<\/p>\n It is common practice that search fund entrepreneurs own 25% of the acquisition target, with the capital provided by their investors.<\/p>\n \u200d<\/p>\n \u200d<\/p>\n Before jumping straight into buying a small business, aspiring entrepreneurs should first learn the ropes. Fortunately, there are many different resources that can be leveraged to make a decision on if ETA is the right path and how to best prepare.<\/p>\n \u200d<\/p>\n The easiest way to start in a structured manner is a course<\/strong>. There are specific courses designed just around acquisition entrepreneurship, for example at Chicago Booth<\/a> or HBS<\/a>.<\/p>\n \u200d<\/p>\n For those who don\u2019t have the time or means to attend one of these classes, there are plenty of free resources on the internet, as well as knowledgeable communities<\/strong>.<\/p>\n \u200d<\/p>\n Examples include the Acquiring Minds<\/a> podcast, or reading about the experiences of searchers like Benny and Christian<\/a>.<\/p>\n \u200d<\/p>\n It is always worth reaching out to people who have gone down this path before and learn from their journey.<\/p>\n Lastly, there are many search funds that actively look for helpful employees in different functions. Finding a relevant job can help build up an understanding and experience before taking the plunge yourself.<\/p>\n Before attempting to search for a business to buy, an acquisition entrepreneur needs to understand which is the right type of company to search for. A few factors need to be considered here.<\/p>\n Firstly, the company should preferably be within an industry<\/strong> the acquirer is familiar with. Taking over a business with no overlapping background is possible, but very challenging.<\/p>\n \u200d<\/p>\n Considering the time horizon<\/strong>, the business should have been around for at least a few years. A proven track record is a great indicator for the future viability of the business and also improves overall brand and perception of the company.<\/p>\n \u200d<\/p>\n In terms of size<\/strong>, the company should generate enough revenue to sustain the buyer and allow for refinancing of a potential loan that was taken out to buy the business.<\/p>\n \u200d<\/p>\n Valuations can rise up to $20 million, depending on the financing possibilities and ambitions of the buyer.<\/p>\n \u200d<\/p>\n Buying a smaller business will obviously be much cheaper, but also puts a lot of pressure onto the founder to grow it quickly.<\/p>\n \u200d<\/p>\n An exception can be companies with very high margins<\/strong>, for example SaaS companies. Here, cash flow can be so high that a smaller company is still a very attractive target.<\/p>\n \u200d<\/p>\n Similarly, a good business should have margins of at least 15%. This is not only a sign of a healthy business, but also one that can withstand a downturn.<\/p>\n \u200d<\/p>\n Buying a venture with slim margins increases risk, especially when acquired with debt.<\/p>\n \u200d<\/p>\n The best customers<\/strong> are those who keep engaging with the business, for example through a recurring revenue\/ subscription model.<\/p>\n \u200d<\/p>\n This means that once the entrepreneur takes over the business, they don\u2019t have to fear rebuilding a new customer base from scratch.<\/p>\n \u200d<\/p>\n Lastly, location<\/strong> is important. If the acquisition target is a business with a physical footprint, the buyer will have to personally move there – and be happy to do so.<\/p>\n \u200d<\/p>\n Buying an internet business is a lot easier in this regard, as they are in most cases transferable and easy to run from around the globe.<\/p>\n \u200d<\/p>\n \u200d<\/p>\n Finding the right business can be a difficult and lengthy process. Many searchers spend two years looking for the right acquisition target before finally closing the deal.<\/p>\n \u200d<\/p>\n Being prepared for these long search times and having the financial stamina to shoulder a full time search without any income is key in becoming a successful acquisition entrepreneur.<\/p>\n \u200d<\/p>\n The first channel is proprietary deal flow<\/strong>. It refers to a buyer having the first chance to acquire a business before the company is presented to other potential buyers.<\/p>\n \u200d<\/p>\n In essence, it means there is no competition for the acquisition target and the entrepreneur can buy the company for a fairly cheap price, as there is no bidding war.<\/p>\n \u200d<\/p>\n Of course, this sounds like an amazing opportunity. Proprietary deal flow is, however, hard to come by.<\/p>\n \u200d<\/p>\n Searchers relying on proprietary deal flow spend a lot of time on cold outreach to sometimes thousands of businesses to assess if they are in the market.<\/p>\n \u200d<\/p>\n Moreover, many founders of acquisition targets will actively seek out other potential buyers when seriously considering selling their business<\/p>\n \u200d<\/p>\n An alternative to proprietary deal flow is engaging with brokers<\/strong>. Brokers help business owners prepare for a sale of their company, engage with potential buyers and handle many of the aspects of the actual transaction.<\/p>\n \u200d<\/p>\n Brokers take a lot of the search efforts off the acquisition entrepreneur\u2019s plate, but come at a cost. Depending on the size of the acquisition target, commission fees between 5-15% can be charged.<\/p>\n \u200d<\/p>\n Even if a broker only charges the sell-side (which is rare), the fee will still impact the purchase price. Moreover, brokers always engage with multiple potential buyers and encourage auction-style bidding to increase their take, so acquisition prices can fluctuate.<\/p>\n \u200d<\/p>\n Instead searchers should leverage acquisition marketplaces<\/strong>. Platforms like Flippa<\/a> (shameless plug) allow business owners looking for an exit, be it a full or partial acquisition, to list their company and get approached by potential buyers.<\/p>\n \u200d<\/p>\n The benefit of using a marketplace for identifying an acquisition target is that they are commonly much cheaper to use than a broker and still connect buyers with sellers who are actively looking for an exit opportunity, thus saving a lot of time on outreach.<\/p>\n \u200d<\/p>\n \u200d<\/p>\n Finding a good business is one thing, paying for it is another. Here, different models<\/a> can be employed.<\/p>\n \u200d<\/p>\n Firstly, acquisition entrepreneurs can simply fund their purchase themselves. This is also referred to as self-funded search<\/strong>.<\/p>\n \u200d<\/p>\n The entire cost of an acquisition is shouldered by the future CEO, which has the benefit of being the sole owner with no other shareholders to answer to.<\/p>\n \u200d<\/p>\n Self-funded acquisitions tend to be much smaller, as many ETA entrepreneurs do not have the personal funds to buy a $10 million annual revenue business.<\/p>\n \u200d<\/p>\n In the United States, Small Business Acquisition (SBA) loans<\/strong> are a common practice in financing a company purchase.<\/p>\n \u200d<\/p>\n Here, a lending partner (e.g. a bank) will loan the entrepreneur the necessary funds to buy a business to then run.<\/p>\n \u200d<\/p>\n In a traditional search fund model<\/strong>, the ETA entrepreneur will raise capital from external partners to buy a business.<\/p>\n \u200d<\/p>\n These investors will then commonly hold around 75% of the company, while the searcher keeps 25% in return for finding, acquiring and running the company.<\/p>\n \u200d<\/p>\n Usually, investors receive preferred stock to ensure liquidity preference and incentivize the entrepreneur to grow the business aggressively.<\/p>\n \u200d<\/p>\n From here, an acquisition entrepreneur can negotiate and close a deal to then take over the business as the new CEO. In many cases, the former owner leaves the company.<\/p>\n \u200d<\/p>\n This is where the real work begins and the company is often repositioned for growth.<\/p>\n \u200d<\/p>\n Further resources: Buying Your Way into Entrepreneurship<\/a>, Buy A Business\u2014Become A CEO<\/a>, Company Contact Data, ETA Models Overview<\/p>\n","protected":false},"excerpt":{"rendered":" Every day new startups launch with 90% failing within a few years time. That can be a very discouraging prospect for many aspiring entrepreneurs. An alternative path to entrepreneurship has gained a lot of attention in recent years: entrepreneurship through acquisition. It promises a way to own and run a company, free of the cold […]<\/p>\n","protected":false},"author":145,"featured_media":32619,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","content-type":"","inline_featured_image":false,"footnotes":""},"categories":[568],"tags":[],"dipi_cpt_category":[],"acf":[],"_links":{"self":[{"href":"https:\/\/flippa.com\/blog\/wp-json\/wp\/v2\/posts\/32331"}],"collection":[{"href":"https:\/\/flippa.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/flippa.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/flippa.com\/blog\/wp-json\/wp\/v2\/users\/145"}],"replies":[{"embeddable":true,"href":"https:\/\/flippa.com\/blog\/wp-json\/wp\/v2\/comments?post=32331"}],"version-history":[{"count":5,"href":"https:\/\/flippa.com\/blog\/wp-json\/wp\/v2\/posts\/32331\/revisions"}],"predecessor-version":[{"id":58292,"href":"https:\/\/flippa.com\/blog\/wp-json\/wp\/v2\/posts\/32331\/revisions\/58292"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/flippa.com\/blog\/wp-json\/wp\/v2\/media\/32619"}],"wp:attachment":[{"href":"https:\/\/flippa.com\/blog\/wp-json\/wp\/v2\/media?parent=32331"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/flippa.com\/blog\/wp-json\/wp\/v2\/categories?post=32331"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/flippa.com\/blog\/wp-json\/wp\/v2\/tags?post=32331"},{"taxonomy":"dipi_cpt_category","embeddable":true,"href":"https:\/\/flippa.com\/blog\/wp-json\/wp\/v2\/dipi_cpt_category?post=32331"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}Where to learn about ETA<\/h2>\n
What makes a good acquisition target?<\/h2>\n
Deal flow: how to find the right business<\/h2>\n
Financing an acquisition<\/h2>\n