Entrepreneurship Through Acquisition: Path to Business Ownership
By Max Donohue
Working a "9 to 5" is not for everyone, but fortunately, an alternative career choice exists. An alternative career choice is called Entrepreneurship Through Acquisition ("ETA"). ETA is for those who want to become their own boss by purchasing and operating a small business.
Ten thousand baby boomers retire daily, and roughly 40% of small businesses are owned by the baby boomer generation. As baby boomers retire, many family-owned businesses do not have a transition plan in place. Business owners' children may not want to take over the family business as they have independently established careers, and finding someone else to operate the business can be challenging.
As a result, many small businesses are prepared to sell to the right buyer, which provides aspiring business owners ample opportunity to pursue an ETA career path.
What is entrepreneurship through acquisition?
ETA is the concept of purchasing an existing small business and operating it as an alternative to a "traditional career." An ETA searcher can become their own boss and rely on the business's success for their career objectives.
Who should pursue ETA?
An individual well-suited for ETA should possess several capabilities. First, they must have basic management and business skills – they know how people operate and can understand financial statements.
Second, the individual should tolerate moderate risk, as every business endeavor involves risk.
Third, they must have a knack for securing funding (from prospective investors, bankers, etc.) to acquire the business.
And lastly, they need the capability to learn different business models in short amounts of time. ETA searchers will potentially encounter hundreds of businesses before finding one that fits their criteria.
Traditional careers come in the form of steady paychecks, steady hours, and lower risk. For some personality types, a traditional career route is a preferred approach. For those who strive to achieve flexible work hours, make important decisions, and pursue risk and reward opportunities, ETA may be right for them.
Ultimately, deciding if one is suited for ETA is a personal decision based on one's experiences and career goals.
What businesses fit ETA?
Businesses well-suited for ETA produce predictable cash flows and moderate growth. Predictable moderate-growth businesses include car washes, property management companies, professional service businesses, commercial window washing businesses, medical clinics, and the like. An ETA business should have enough cash flow to pay the owner a salary and reinvest funds into the business for expansion opportunities.
Unlike startups, these businesses should produce cash flow the first day of ownership. The businesses should not require capital from external sources on an ongoing basis to keep the business alive or moderately expand it. ETA businesses must have a proven track record, employees, and, possibly, management. The businesses are typically too small for private equity funds or other institutional-type buyers, but they are not so small that they require the owner to operate the entire business alone. In terms of numbers, ETA businesses should produce between $5,000,000 to $15,000,000 in revenue and about $750,000 to $3,000,000 in free cash flow.
Remember that these numbers are a general rule and may vary downward. Anything above these numbers is typically reserved for institutional-type buyers and are not ideal ETA candidates.
How can I buy a small business?
Buying and operating a small business seems intuitive, but many believe the financial barriers are too burdensome. Fortunately, many financing options help overcome the financial obstacles. More creative financing options include seller financing, private investors, or loans from the Small Business Administration ("SBA").
Between a downpayment of varying sizes, seller financing, SBA loans, and private investors, potential ETA seekers have a wide variety of financing options.
There rarely is a one-size-fits-all approach to financing. Every deal comes with its own unique terms and conditions. Sellers want to see their life's work continue to progress and grow, and they may be willing to accommodate particularly unique financing arrangements to make the deal work for the right buyer.
How to conduct a business search?
Experts recommend conducting a search over two years, full-time, and across many different markets. Although this approach is ideal, it can be challenging to dedicate this amount of time to the endeavor. Most times, and what attorneys often see, is a more natural search than the one described. Transactions in this space often include family-owned businesses transitioning to one or more key employees, related parties, or business acquaintances.
A business owner is often willing to sell, but it takes someone involved with the business or close with the owner to convince them to begin the transition process. This process usually takes substantial time, so it is never too soon to plan from a seller’s perspective. At Woods Fuller, we work on many business acquisitions and sales ranging in size from small to large in scale.
If you are interested in pursuing an ETA opportunity or selling your business, our attorneys are available to help in all aspects, which includes deal sourcing, negotiations, capital raising, and the general corporate work that follows. Call our office or visit our website at www.woodsfuller.com to learn more.
Sources:
https://insight.kellogg.northwestern.edu/article/entrepreneurship-through-acquisition
https://store.hbr.org/product/hbr-guide-to-buying-a-small-business/10090
https://www.hadleycapital.com/insights/managing-a-small-business/business-succession-planning
https://www.guidantfinancial.com/learning-center/infographics/2018-baby-boomers-in-business/