Entrepreneurship Through Acquisition

Discover the alternative path to business ownership.

By Saul Gorman On Jun 29, 2017

How can one pursue an entrepreneurial career while minimizing the risks of starting a new business? For mid-career and millennial businesspeople, entrepreneurship through acquisition (“ETA”) may be an appealing career choice.

An increasing number of MBAs and professionals in middle management are choosing to pursue ETA. There are businesses in every price range that can be profitable investments. All it takes is a commitment to search for the right opportunity.

Before looking for an acquisition target, an individual should decide on a search model suited to one’s experience, goals and financial resources. Here are a few examples:

• Self-funded, Independent Search: With little personal equity, one can still acquire a business. A self-funded entrepreneur can often obtain most of the necessary financing through a government-backed SBA loan. Many sellers are also willing to finance a deal themselves. The self-funded ETA model is desirable for those wishing to keep most of the equity in an acquisition.
• Fundless Sponsor: In this search model, a sponsor seeks out a mid-market acquisition target, with the intention of bringing the deal to investors. Following the acquisition, the sponsor usually aims to operate the company for the investors in exchange for carried interest.
• Search Fund: Searching for the right mid-market business can take years. An individual might raise capital in advance to fund the search, paying oneself a salary and agreeing to terms with investors up front. A search fund ensures that an individual can put food on the table while working on the search full time. Raising a search fund generally requires an MBA or prior management experience.

Entrepreneurs have several avenues by which to search for a business to acquire, such as direct outreach to businesses. However, the response rates are generally low, so quantity of outreach is important. Searchers often hire interns to augment this effort.

Business brokers are also a valuable source for deals. Searchers should try to get early access to listings by building relationships with brokers.

Intermediaries can also be great resources for connecting searchers to business owners. Accountants, attorneys and financial advisors are good places to start.

For additional guidance, see Harvard Business Review’s “Guide to Buying a Small Business” and Stanford University’s “Search Fund Primer,” both available online. For business owners looking to sell, ReverseSearchFund.com is a good resource.

About the Author: Saul Gorman is an independent consultant who holds a Wharton MBA. He is actively pursuing a self-funded search to acquire a business.

 

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