Entrepreneurship through acquisition (ETA) refers to a strategy employed by an entrepreneur which involves buying and growing an already established business. This approach can be less risky than launching a business from scratch. However, it comes with its own set of challenges. Over the last two decades, the popularity of ETA has grown and is now offered as a typical curriculum option by many graduate-level business schools.
So, in this blog, we will delve into the fundamentals of ETA and several ETA models that exist. In addition, we will cover the essential factors to take into consideration when pursuing this entrepreneurial path.
Entrepreneurship Through Acquisition In the Small Business Space
Small organizations frequently undergo ownership transition and management succession. This is because the funding required to acquire a small firm is lower, and so is the capital needed to operate it.
The baby boomers are the largest business owner generation in the United States, in charge of over 40% of all small firms. If these baby boomer-owned businesses are going to have a sustainable future, they require smooth management and ownership transitions. However, according to a recent study conducted by Wilmington Trust, more than 60% of boomers do not have a succession plan in place. Moreover, many of them have children who are not interested in carrying the family agency. In this case, ETA might be a great exit option.
There are specialized services provided by ETA ‘searchers’ who scout local small businesses and connect them with possible buyers. Because access to investment cash is frequently a significant limiting factor in any acquisition, ETA searchers focus more on small businesses, which might be relatively cheap to buy.
With more than 30 million small businesses in the United States, how can ETA searchers identify which companies to buy in the most time and resource-effective way?
Ideal Entrepreneurship Through Acquisition Targets
The three key ETA search criteria are company characteristics, target industry, and geography.
But, before beginning a search for a firm in a specific industry and region, ETA searchers must first choose which ETA model is a good fit for their requirements and objectives.
Merger and Acquisition Strategies
There are several merger and acquisition strategies for small business ETA. Below we will outline the most popular ones.
Self-Funded Search
The most popular search model is a self-funded one. A self-funded search is also known as a “fundless sponsor.” This involves a private equity firm seeking to “sponsor” an acquisition without the financial resources to finish it on its own.
The entrepreneur is solely responsible for finding a suitable acquisition target. The entrepreneur determines the best financing strategy for the purchase once a business has been identified as suitable to buy.
Deals are usually backed with a mix of personal cash, venture capital, seller financing, and bank financing. The majority of small company purchases start as self-funded searches.
Incubated Search
An incubated search and sponsored search are similar in that the searcher has invested money into the search and acquisition.
The significant distinction is that the searcher has office space with other searchers and access to shared search infrastructure, administrative assistance, and regular interaction with other searchers.
The platform is designed to assist searchers, and the incubator focuses on recruiting and hiring search interns. A database of possible acquisition targets is shared by seekers.
Crowd-funded Search
The crowd-funded search is the entrepreneur’s method of raising money for the search and acquisition.
Preferred shares and/or convertible debt may be used to structure search capital. Common shares, preferred shares, or a mix of both with different liquidation preferences, PIK rates, and so on can be used to raise acquisition capital.
Time Commitment
From the time that a small company owner is considering selling their firm to the point when they finalize the transaction, it usually takes around one year.
So, it takes a lot of hard work and dedication to reach an effective ETA conclusion, but the potential benefits make it worthwhile!
