As more entrepreneurs choose the route of Entrepreneurship Through Acquisition (ETA), the business world is seeing a new trend emerge. With baby boomers heading into retirement and a wave of businesses up for sale, acquiring a company rather than starting one from scratch presents an exciting and potentially less risky path to building your empire. Here’s what you need to know to make the right move and secure your future as a business owner.
Why ETA is Gaining Popularity
For aspiring entrepreneurs, ETA offers a compelling alternative to the traditional route of launching a startup. It provides a way to sidestep many of the risks and unknowns of starting a business from the ground up, as the new owner steps into an established company with an existing customer base, revenue streams, and infrastructure. Many baby boomers, who own a significant share of businesses across the UK and the US, are ready to retire, creating a wealth of opportunities for those seeking to purchase a business.
In contrast to startups, acquiring an established business offers immediate cash flow and proven business models, reducing the risk of failure. However, knowing which business to buy and how to navigate the acquisition process are crucial steps on this journey.
Defining Your Target Business
The first and most critical step is determining what kind of business you want to acquire. It’s essential to consider industries that interest you or those where you can leverage your expertise. However, your options may be influenced by whether you choose to self-fund your acquisition or seek the backing of a search fund.
A search fund is an investment vehicle through which investors provide capital to entrepreneurs to help them search for, acquire, and grow a business. This structure can limit your options, as investors may prefer industries they are familiar with or feel are low-risk. If you opt for self-funding, the range of possibilities expands significantly, allowing you to pursue businesses that may stretch your skillset but offer higher potential returns.
Finding the Right Business: Where to Look
Finding a business for sale isn’t always straightforward. Many available businesses don’t advertise publicly. However, a range of strategies can help you uncover the perfect opportunity.
1. Networking: One of the most effective ways to find acquisition opportunities is through networking. Reach out to industry contacts, former colleagues, and business groups. This is particularly valuable if you are targeting a specific sector or region, as these connections may provide leads on off-market opportunities.
2. Professional Advisors: Accountants and legal advisors who specialise in business transactions are another excellent resource. Many business owners first discuss their intentions to sell with their accountants, making them valuable gatekeepers to deals that aren’t widely advertised.
3. Investment Banks: Regional investment banks also play a key role in matching buyers with sellers. Building relationships with these institutions can open the door to early-stage opportunities before they hit the broader market.
4. Direct Outreach: Identifying businesses that meet your criteria and approaching them directly can be highly effective, albeit time-consuming. This strategy allows you to gauge whether the business owner is interested in selling, often before competitors have the chance to engage.
5. Industry Groups: Industry associations and trade groups often have insider knowledge of businesses for sale within their sectors. Building relationships within these groups can provide valuable leads.
Evaluating Your Potential Acquisition
Once you’ve identified a target, the next step is to assess whether the business is the right fit for you. First, consider if the business aligns with your skills and interests, and whether it operates in an industry with growth potential.
Next, delve into the financials. Sign a non-disclosure agreement (NDA) to gain access to key financial documents, including revenue, profitability, and growth metrics. The valuation process follows, which involves determining a fair price based on the company’s earnings, assets, and liabilities.
Minimising Key Person Risk
One of the most significant challenges when acquiring a small business is mitigating key person risk. Many small businesses rely heavily on the owner or a small executive team for day-to-day operations and key relationships with customers and suppliers. If these individuals leave, the business may struggle to maintain its momentum.
Before proceeding with the purchase, assess how dependent the business is on its current leadership. Engage with the owner and senior staff to understand their roles and identify any potential gaps that would need to be filled during the transition.
Understanding the Culture
While financial performance is critical, it’s also essential to understand the company’s culture. As a new owner, aligning with the business’s values and vision is crucial to its long-term success. Spend time getting to know the team and their motivations. A company with a strong culture and committed workforce is far more likely to thrive after the acquisition.
Securing Financing for Your Purchase
Finally, securing the proper financing is essential to closing the deal. Whether you’re self-funding or relying on investors, most acquisitions are financed through a combination of equity and debt. Before finalising your target business, it’s a good idea to consult with bankers and loan officers to understand how much debt you can take on and what terms they offer.
Your Path to Success
Acquiring a business is a significant commitment, but with careful planning, it can be a rewarding and lower-risk way to become an entrepreneur. By understanding the process, from identifying the right industry to managing key person risk and securing financing, you can set yourself up for success and build your empire through acquisition.
