What You Need to Know to Buy the Right Business and Acquire Your Empire Once you've decided to follow the road of entrepreneurship through acquisition (ETA), it's time to focus on what your destination should be and what supports can help you get there.
By Hilt Tatum IV Edited by Kara McIntyre
Key Takeaways
- Entrepreneurship through acquisition (ETA) presents a lucrative and lower-risk pathway as baby boomers retire, offering a wealth of businesses for sale.
- Key strategies in ETA include identifying the right industry, efficiently searching for potential businesses and effectively minimizing key person risk.
- Understanding a target company's operations, securing proper funding and preparing for the transition are pivotal steps in the ETA journey.
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In my previous article, I shared my thoughts on why entrepreneurship through acquisition (ETA) may be a more lucrative, less risky route than building a startup.
We discussed the ample opportunities for buying a business as the baby boomer generation — which owns most of the businesses across the U.S. — is looking to retire and sell their companies to the next generation.
After deciding whether you'll back your efforts through a search fund or self-funding, it's time to consider what type of business you want to buy and how you can find and acquire it.
Related: Want to Start a Business? Consider Buying One Instead — Here's Why.
Where to begin
The most crucial step is determining what industry or market you are interested in or believe you can contribute substantial expertise to.
If you're using a search fund structure, your options may be limited by the parameters set by your investors, as they will have thoughts on the best targets, especially in areas in which they're most comfortable.
If you're self-funded, the sky's the limit: You can look within your comfort zone or take a risk on a company that will stretch you and challenge you but could have greater financial returns.
Where to look
You might be surprised to hear that finding these new business opportunities can be challenging unless you know where to look.
Here are a handful of ways you can search for the best results.
- Networking: If you're self-funded and focused on a particular industry or geography, you can look to your network to see what could be out there. There's no shame in opening your LinkedIn rolodex and putting feelers out. Most people want to help, even if it's as simple as passing along info they have.
- Service providers: Accountants are usually the best source for off-market deals since they are most familiar with business owners' financial plans. If you can find an experienced lawyer in this area, they can also be a great resource.
- Regional investment banks: This group of financial institutions' sole goal is to help prospective entrepreneurs find businesses to buy. Initially, you may only access deals approved by others. Build relationships to see deals before others.
- Direct outreach: This is where your due diligence skills come into play. Like it sounds, you're identifying and calling businesses directly to inquire about their status and whether they might be interested in selling. It's effective but time-consuming, and you are also talking to people other searchers may be looking at.
- Industry associations/groups: This method is better suited for industry-specific searches. You can contact the heads of the associations or network within the group.
Related: 63 Small Business Ideas to Start in 2024
What to look for in acquiring a business
With so many possibilities out there, it's hard to narrow down your search.
I recommend seeking opportunities in more traditional industries, such as manufacturing, industrial services or even IT businesses that service traditional sectors. You would be surprised at how many profitable companies you'll find here that people tend to forget about.
You'll want to investigate industries that interest you and those with strong growth potential that you can unlock by bringing your skill set to the table. If you have previous experience, that's even better, as you'll be better able to understand market trends and map out the competitive landscape.
Uncovering valuable details
Unfortunately, your research becomes more difficult as you select your company of interest.
You can obtain most of the high-level information you need by entering into an NDA. This would usually include revenue numbers, growth, profitability, headcount, and valuation range. The process involves outreach to the business, an intro call to gauge interest, signing an NDA, gathering financials, determining a valuation and submitting an LOI, conducting due diligence, drafting acquisition documents and closing the deal.
Alternatively, you could set strict search parameters to find only businesses that meet your criteria. This will help you stay disciplined throughout the search process and avoid wasting valuable time on business owners who are simply "testing the waters."
Potential search parameters could include specific EBITDA multiples or valuations you're targeting, growth levels, particular assets, levels of debt or any other valuable data point.
Key person risk
If you're satisfied with the financial status, it's time to investigate the business operations and assess the strength of the management team.
Key person risk is the most significant threat in buying a small business. Many businesses can't function without the CEO or someone on the executive team. Often, the CEO is the fundamental relationship holder for suppliers, customers and others. So, when they leave, those key relationships might do the same.
You should look to identify this as early as possible so that you do not waste precious time only to discover that there is too much key person risk.
Related: 7 Steps to Acquiring a Small Business
Understanding the company and its people
This is also an excellent chance to see what aspects of their current operation are working, what's not and what new ideas you might be able to implement that could build upon the foundation of the business.
Take the time to understand the people and the culture. Does this company's values and vision align with yours? Are they even close? It's not wise to buy a company you don't believe in, even if the business is vital.
Work closely with the owners to understand their employees' motivations and morale. Spending this time can give you a good sense of the culture.
Financing potential deals
Once you are satisfied that you have the best company lined up for purchase, it's time to secure the proper funding to bring it home.
If you went the search fund route, now is the time to talk to your investors about putting some money up for the deal. In 90% of cases, it will be some combination of investor equity capital plus loans. If you're considering loans, speak with the loan officers or bankers before finding something. Find out how they underwrite and what they look for so you know how much debt you could get if you find something in their parameters.
Like many entrepreneurs, you can invest your own finances in the purchase or borrow from family or friends to help you get started in the short term.
What's next?
With your search ending and the purchase complete, it's time to focus on the next phase of ETA: the transition of ownership and running the business as your own.
In my next article, I'll outline the critical factors of a smooth transition and how to ensure it goes well for you, the previous owner and the company. We'll also examine how to approach running this new business the way you want while still honoring the legacy you inherited.
