Want to Start a Business? Consider Buying One Instead — Here's Why. Founding a startup is stressful and can take years to pay off — if it ever does. Entrepreneurship through acquisition (ETA) allows aspiring founders to own businesses without spending the time and energy to start their own.
By Hilt Tatum IV Edited by Kara McIntyre
Key Takeaways
- Entrepreneurship through acquisition (ETA) is an alternative, often less risky path to business ownership by purchasing an existing business instead of starting from scratch.
- With a significant percentage of U.S. businesses owned by baby boomers looking to retire, there is a ripe opportunity for acquisitions, especially considering the current lack of succession plans.
- ETA offers two main pathways to potential business owners: self-funding and search funding, each with its benefits and challenges.
Opinions expressed by Entrepreneur contributors are their own.
"Less sizzle, more steak."
I admire this pithy yet accurate description of entrepreneurship through acquisition (ETA) from a Northwestern Kellogg School of Management professor.
While it might not be as hyped as the startup life (the sizzle), buying an already established and solvent business and running it your way (the steak) is still entrepreneurship — it's just a different, often less risky road to get there.
ETA is gaining momentum thanks to the baby boomer generation. With more than half of U.S. businesses — 52% — owned by those age 55 or older, many are looking to sell their companies and head off into the sunset of retirement. Combine that with the lack of succession planning (e.g. no family or employees interested in taking over), and 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 while forgetting that the backbone of a healthy economy comprises small but steady businesses. After all, small businesses generate 44% of America's gross domestic output (GDP).
I'm not here to stifle the enthusiasm of aspiring entrepreneurs who believe their idea might be the next unicorn. Instead, I believe ETA has a higher likelihood of a lucrative outcome and should be considered.
Related: 4 Models for Building Value Through Acquisitions
Why ETA?
The startup life is full of stress, anxiety, long days and little sleep as you constantly search for new customers and a fit for your solution. Not to mention little pay, even when you get a small influx of capital to extend your runway a little longer.
Yet countless studies show that only 10% are considered "successful." Far fewer generate any actual level of wealth for the founders.
ETA provides a smoother route to success on a road already paved by someone else, many of whom are part of the baby boomer generation. According to the U.S. Census Bureau, boomers own 2.34 million small businesses in the U.S., which employ more than 25 million people.
As the "Silver Tsunami" tears through industries — the mass retirement of baby boomers — there are ample acquisition opportunities across the board. These businesses are already proven within their industry, have an existing customer base and have a usually steady cash flow coming in.
The right person could quickly take a healthy business to the next level. Instead of exhausting mental and emotional energy on something that may never cross the finish line, you're bringing fresh legs and new ideas to carry the baton from someone else.
The first step in your ETA journey
To start, you need to research to determine what financial pathway you want to follow. Will you self-fund your search and attempt to pay your own way, or will you form a search fund to provide the capital necessary to help you find your business?
Essentially, this choice comes down to which level of freedom you value most: the financial freedom of a paid two-year window to find the right business or the freedom to run your business your way.
Search funding gives you the capital to execute, including a salary to look for a business, but you give up your flexibility on time, industry and location. Self-funding provides flexibility on time, location and industry; the downside is you have to come up with the cash on your own.
Related: How Leaders Can Build Acquisition-Ready Companies
Search funding
As an aspiring entrepreneur, you use a search fund to assemble a team of investors to cover the costs of finding and acquiring a business.
These costs include a salary and other requirements to ensure you can find and procure a lucrative business deal — typically with a drop-dead date of two years. The additional funding from investors — and their networks — helps you acquire much larger companies than you might be able to on your own.
While you have more financial freedom early on, using a search fund, you must help your investors find the best opportunities regardless of industry and geography. You also face the pressure and expectation to grow the business for 5-7 years and then sell it.
Benefits
- Immediate access to capital and financial resources for a more comprehensive search
- Get guidance and support from experienced investors with valuable connections.
- With the backing of reputable investors, your credibility is immediately enhanced with sellers.
Challenges
- You have less equity in the company as a large portion goes to your investors.
- More significant pressure to deliver may impair your ability to make the best decision.
- Potential conflicts with investors on strategy or vision during the process.
- It is a more complicated process with more investors to satisfy.
Self-funding
Self-funding is precisely what it sounds like: as an entrepreneur, you use your money and resources to fund the search process and purchase a business.
While not everything has to come from your own pocket — borrowing money from family, networking, loans, etc. — the financial risk is much more significant as you're essentially placing all your chips on your ability to find the right company.
If you find and buy your business, you have the freedom and flexibility to run it your way. You can target whatever geographies or industries you want and make the company fit your needs or desires rather than investors' expectations.
Related: Why You Should Do Everything You Can to Self-Fund Your Business
Benefits
- You have full ownership of the business and can make your own decisions.
- Pick an industry and geography that works for you rather than investors.
- No management of stakeholder relationships or expectations simplifies the process.
- You retain total equity in the business and keep higher returns and profits.
Challenges
- You could lose a large portion of your savings if it fails.
- You have reduced access to financial resources besides loans, which may limit your scope.
- All significant decisions fall squarely on your shoulders, with little advice or experience to draw from.
While the road to entrepreneurship is a little smoother through acquisition, it still requires careful navigation, regardless of your chosen route.
This is just the beginning, though. I'll be back with tips on your next steps, focusing on how you can find a business and what the acquisition process should look like.
