Create your very own Auto Publish News/Blog Site and Earn Passive Income in Just 4 Easy Steps
Opinions expressed by Entrepreneur contributors are their own.
“Less sizzle, more steak.”
I admire this succinct but accurate description of acquisition entrepreneurship (ETA) from a professor at Northwestern Kellogg School of Management.
While it may not be as hyped as the startup life (the sizzle), buying an already established and solvent business and running it on your own terms (the steak) is still entrepreneurship – it's just different, often less so risky way to get there.
Thanks to the baby boomer generation, ETA is gaining momentum. With more than half of U.S. businesses – 52% – owned by people age 55 or older, many are looking to sell their businesses and head toward retirement. Combine that with the lack of succession planning (e.g. no family or employees interested in taking over), this is the right time to buy.
Our industry tends to glorify the one-in-a-million ideas that catch fire and make billions of dollars, forgetting that the backbone of a healthy economy is small but stable businesses. After all, small businesses generate 44% of America’s gross domestic production (GDP).
I'm not here to quell the enthusiasm of aspiring entrepreneurs who believe their idea could be the next unicorn. Instead, I believe ETA has a higher probability of a lucrative outcome and should be considered.
Related topics: 4 models for increasing value through acquisitions
Why ETA?
Startup life is full of stress, anxiety, long days and little sleep as you are constantly looking for new customers and a solution that suits you. Not to mention the pay is low, even if you get a small infusion of capital to extend your runway a bit.
Yet countless studies show that only 10% are considered “successful.” Far fewer generate actual wealth for the founders.
ETA offers a smoother path to success on a path that has already been paved by someone else, many of whom are part of the baby boomer generation. According to the U.S. Census Bureau, baby boomers in the U.S. own 2.34 million small businesses that employ more than 25 million people.
As the “silver tsunami” hits the industry – the mass retirement of baby boomers – there are numerous acquisition opportunities in all sectors. These companies are already established in their industry, have an existing customer base and generally have a steady cash flow.
The right person could quickly take a healthy company to the next level. Instead of expending your mental and emotional energy on something that may never reach the finish line, bring fresh legs and new ideas to take up the baton from someone else.
The first step on your ETA journey
First, you need to do your research to figure out what financial path you want to take. Will you self-fund your search and try to support yourself, or will you set up a search fund to provide the capital needed to help you find your business?
This choice essentially comes down to what level of freedom you value most: the financial freedom of a paid two-year window to find the right company, or the freedom to run your business the way you want.
Search funding gives you the capital you need, including a salary, to search for a company, but you give up your flexibility in terms of time, industry and location. Self-financing offers flexibility in terms of time, location and industry. The disadvantage is that you have to raise the money yourself.
Related: How Leaders Can Build Acquisition-Ready Companies
Search funding
As an aspiring entrepreneur, you put together a team of investors through a search fund to cover the costs of finding and acquiring a business.
These costs include a salary and other requirements to ensure you can find and close a lucrative deal – usually with a two-year deadline. The additional funding from investors – and their networks – helps you acquire much larger companies than you might be able to on your own.
While a search fund gives you more financial freedom early on, you need to help your investors find the best opportunities, regardless of industry or region. You also have the pressure and expectation to grow the company for five to seven years and then sell it.
Advantages
- Instant access to capital and financial resources for a more comprehensive search
- Get advice and support from experienced investors with valuable connections.
- Backing reputable investors will immediately boost your credibility with sellers.
challenges
- You have less equity in the company because a large portion goes to your investors.
- Greater pressure to perform can impact your ability to make the best decision.
- Potential conflicts with investors regarding strategy or vision during the process.
- It is a more complicated process with more investors to satisfy.
Self-financing
Self-funding is exactly what it sounds like: As an entrepreneur, you use your money and resources to finance the process of finding and purchasing a business.
While not everything has to come out of your own pocket – borrowing money from family, networking, loans, etc. – the financial risk is much greater because you're essentially betting everything on finding the right company.
When you find and purchase your business, you have the freedom and flexibility to run it the way you want. You can target any region or industry and tailor the company to your needs and wants rather than investor expectations.
Related: Why You Should Do Everything You Can to Self-Fund Your Business
Advantages
- You have full responsibility for the company and can make your own decisions.
- Choose an industry and region that is right for you, not investors.
- No management of stakeholder relationships or expectations simplifies the process.
- You keep all of the company's equity and earn higher returns and profits.
challenges
- If you fail, you could lose a large portion of your savings.
- You have limited access to financial resources other than loans, which can limit your freedom of action.
- All important decisions fall squarely on your shoulders, without you having any advice or experience to fall back on.
While the path to entrepreneurship through acquisition is a little easier, it still requires careful navigation regardless of the route you choose.
However, this is just the beginning. I'll give you tips for your next steps, focusing on how to find a company and what the acquisition process should look like.
Create your very own Auto Publish News/Blog Site and Earn Passive Income in Just 4 Easy Steps
