Entrepreneurship through acquisition: How to get started
What is entrepreneurship through acquisition (ETA)? 💡
ETA: buying and growing a small business as a means of becoming an entrepreneur
Acquisition entrepreneurs who raise external capital to buy a business to then run are commonly referred to as searchers, or running a search fund.
Benefits: less risky, revenue and customers to start with
Downsides: can be difficult to finance, less equity (if an investor is involved)
Where to learn about ETA? 📍
Courses: e.g. Chicago Booth or HBS
Podcasts: e.g. Acquiring Minds
Reports: e.g. Benny and Christian
Jobs: e.g. work for a search fund before starting one
What makes a good acquisition target? 🎯
Industry: acquirer should be familiar with it
Time horizon: business should have been around for at least a few years
Size: big enough to sustain the buyer, even if there is a dip in performance
Valuation: can start small, up to $20M (mostly with financing at that point)
Margins: at least 15%
Customers: best if recurring
Location: acquirer must be willing to move (if business cannot be moved)
Finding deal flow 🔎
Proprietary deal flow
Direct outreach to acquisition target, no other potential buyers are involved
Benefits: cheap valuations due to lack of competition
Downsides: very difficult to find deals, most times founders will actively reach out to alternative buyers anyway to get multiple bids
Brokers
Benefits: take a lot of work off the searcher's plate, provide good deal flow
Downsides: commission fees between 5-15%, competing with other buyers
Marketplaces
Shameless plug: BitsForDigits, our acquisition marketplace
Benefits: deal flow is much cheaper as opposed to brokers
Downsides: competing with other buyers
Financing an acquisition 💸
Self-funded search: acquisition entrepreneurs simply fund the purchase themselves
SBA loans: Small Business Acquisition loans to buy a business (mostly US)
Traditional search fund model: ETA entrepreneur will raise capital from external partners to buy a business
Read more here: Entrepreneurship through acquisition: How to get started
That's a cool mindset. Do any of you know if foreigners can get SBA loans?
I believe you need to be a PR and then you can also get one
Got it, thanks. Been really common in Brazil for people from consulting coming to come to the US for an MBA, raise money for a Search Fund and invest it in Brazil once they are done. Those were mainly through equity tho, we don't have that kind of credit access there haha
True, search funds also tend to have a bit more capital to deploy as opposed to a simple SBA loan.
But cool to know that there are basically US search funds for Brazilian businesses.
Thank your sharing!
Here goes a book recommendation: "Buy then Build", by Walker Deibel.
I was recently pitched by a search fund actually. I don't like it as an investment opportunity, I'd rather be the buyer and entrepreneur myself :)
Will definitely check it out. And yeah, totally agree --> operating > investing
My old boss started his entrepreneurial journey this way. He bought a small HVAC company and grew it to about $6MM ARR. Then sold it to a private equity firm and started something else.
Amazing! I always hear these stories about HVAC, commercial landscaping etc. - super offline businesses but very predictable revenue with decent margins.
Hey Jan, thanks for sharing - great advice. Did you become an entrepreneur through acquisition? If so, why did you choose to do it this way - was it the point you mentioned about it being less risky than starting your own business?
Hey! :) I actually went the "hard" route and co-founded a business from scratch - but it is a marketplace on which aspiring acquisition entrepreneurs can find a company to buy. Hence, definitely pretty deep in this space.
In future, I can most certainly see myself buying an existing business over just launching another startup! :)
If you're looking for buying micro-startups check out Microns.io. I'm the founder so will be happy to help with any questions.
I started xo.capital and have bought 6, sold 1 and operate 5. lmk if I can be helpful!
Do you manage everything yourself?
no, we have a team of 4 full time people (+me)