Introduction to Entrepreneurship through Acquisition (ETA)
The path to entrepreneurship is often synonymous with innovation, risk-taking, and starting something from the ground up.
Far-sighted modern entrepreneurs are questioning these fundamentals. Does the path to financial independence, a challenging yet rewarding lifestyle, and an escape from the 9-to-5 need to be so fraught with risk?
The answer is no.
Introducing: Entrepreneurship Through Acquisition (ETA).
About ETA
Entrepreneurship Through Acquisition involves the strategic purchase of an existing business. The aim is to leverage its established infrastructure, customer base, and revenue streams to grow a viable company into a highly profitable enterprise.
Unlike the traditional startup model, where everything must be built from scratch, ETA allows entrepreneurs to step into the shoes of an existing business owner, taking the reins of a proven business model.
The high failure rates associated with new startups are offputting for new entrepreneurs – and for good reason. If you’re considering putting a huge chunk of your hard-earned money into an unproven venture, you’re putting yourself at serious risk.
Instead, ETA offers a tried-and-tested pathway to entrepreneurship that marries the hard work and success of the previous owners with your vision for growth.
Comparison with Traditional Startups
From developing a viable product to building a customer base and securing financing, the road to success as a founder is fraught with obstacles.
ETA offers a more calculated and potentially less risky approach. Entrepreneurs who can successfully identify and purchase a company with potential can benefit from:
- A proven track record. The acquired business has already demonstrated its viability. It has established processes, products, and market presence.
- Immediate revenue streams. Unlike a startup, which may take years to become profitable, an acquired business typically comes with existing customers and revenue.
- Easier access to financing. Lenders and investors often view acquisitions as less risky than unproven startups – it’s much easier to raise capital.
This pathway demands careful consideration, due diligence, and strategic planning. If you don’t enjoy research, you’ll struggle as an acquisition entrepreneur!
In fairness – if you don’t enjoy research, you’ll struggle as any type of entrepreneur.
However, if you’re willing to:
- Invest extra time early on into learning about the best sectors for ETA
- Understand how to identify a business that’s primed for acquisition
- Identify and choose the appropriate valuation method for your chosen target
…then you’ve just uncovered a world of possibilities.
Advantages of ETA
Reduced Risk
Starting a business from scratch involves significant uncertainty and risk. The failure rate for new startups is high – a stunning 90% of startups fail eventually, with many of these coming in the first year or two.
An acquired business typically comes with a pre-existing customer base, some degree of liquidity, and experienced personnel who understand the company’s operational model. These are invaluable assets to a business owner that are often inaccessible to new entrepreneurs.
Faster Growth
A major advantage of acquisition is the ability to leverage existing assets. Taking advantage of the existing infrastructure, employees, and client relationships can accelerate growth and let you put a growth plan into action much faster than you would be able to as a founder.
You can also blend the strengths of the acquired business with new strategies and resources from other businesses in your portfolio.
For example, if you’ve acquired a cybersecurity startup and you already own a business specializing in WordPress web design, you know that your existing customers will be interested in a potential add-on service from your new company. This benefits both your businesses.
Furthermore, an existing business should already have a foothold in the market. This allows for quicker expansion and market penetration – building a client base is one of the greatest challenges of entrepreneurship.
With ETA, you have it laid out in front of you.
Strategic Opportunities
One of the greatest benefits of ETA is that you can acquire valuable intellectual property or specialized skills that would be time-consuming or costly to develop independently. This unlocks strategic opportunities that most founders could only dream of.
Strategic acquisitions also take the burden off the entrepreneur to create a diverse portfolio strictly from their own ideas. Diversity can be limited by your skillset.
This isn’t the case with ETA.
Serial entrepreneurs must always consider how a new acquisition or development fits into their existing portfolio. Acquiring a business in a complementary field can diversify revenue streams and reduce dependence on a single market or product line.
This is advantageous for each business in your portfolio, but it also contributes towards the ultimate goal of financial independence.
Risks and Challenges of ETA
Integration Issues
The greatest challenge of ETA is maintaining your own standards for how you expect a company to perform – while respecting the values of the business you’ve acquired.
You’ll inevitably encounter difficulties along the way – but these can all be smoothed by prior research, being willing to listen, and understanding your role and responsibilities as a leader.
In my experience, the most common issues you’ll face are:
- Cultural clashes: Every business has its own unique culture and way of doing things. Immediately trying to establish a contrasting culture can lead to misunderstandings, conflicts, and a loss of productivity.
- Loss of key employees: An acquisition can create uncertainty and anxiety among employees. If not managed carefully, this can lead to the loss of key staff, impacting performance and growth.
- Miscommunications: Key personnel at the acquired company must understand the buyer’s vision for the business and how it can be achieved. Staff will buy into an idea if they understand the benefits it will bring to them and their colleagues – failing to communicate this vision will trickle down, sapping morale and making your strategy harder to execute.
Overvaluation
One of the most significant risks in any acquisition is overvaluation. Understanding valuation methods and where to apply them is an essential skill for acquisition entrepreneurs.
If the acquisition isn’t valued accurately, you’ll end up paying more than the business is worth. This can add years onto the projected timescale for a successful exit.
Overpaying for a business can also strain financial resources, limiting the ability to invest in growth, innovation, and other strategic priorities.
Hidden Liabilities
Your comprehensive due diligence process should protect you against hidden liabilities – but you need to be aware that they sometimes come up.
I’ve encountered them. Every acquisition entrepreneur I know has encountered them.
Here are the most common examples.
- Legal issues: Unresolved legal disputes, compliance issues, or other legal liabilities can potentially sink your plans for a business.
- Debts: You probably have enough of these just from financing the acquisition. Hidden or underestimated debts can severely undermine financial stability and limit growth potential.
- Underperforming assets: An acquired business may have underperforming or obsolete assets that need to be addressed. This can require additional investment and create challenges in achieving your expected returns.
Practical Considerations
Due Diligence
A thorough investigation of the target business is essential to uncover potential risks and accurately value the acquisition.
I can’t overstate the importance of due diligence, both when you’re considering the acquisition and after you’ve sent your LOI. Lack of attention to detail is the main reason that acquisition entrepreneurs find themselves owning a company that just doesn’t match up to their goals.
Here are the core 3 steps of due diligence – perform them, repeat them, and repeat them again during every stage of the acquisition process.
- Financial analysis. This means reviewing financial statements, tax returns, and other financial documents to assess the financial health and profitability of the business.
- Legal review. Working with an acquisition lawyer is highly recommended here. You’ll need to examine contracts, compliance, intellectual property, and other legal aspects to identify potential liabilities or issues.
- Operational assessment. You’ll need a solid understanding of the business’s operations, systems, processes, and culture to recognize how it functions and identify potential integration challenges.
Financing
Understanding the financing options and structures is crucial, as acquisitions often require significant capital.
Equity financing is a popular choice. This includes using personal funds, venture capital, or private equity to finance the acquisition.
Debt financing is perhaps the most common option, especially if you have limited cash flow to begin with. This can include bank loans, lines of credit, or government loans.
While obtaining a loan at all is difficult at the moment, it’s better to have no loan at all than a loan you’ll never be able to repay. Realism is essential when considering debt financing.
Hybrid models are increasingly popular. These may include a mixture of debt, equity, and also search funding – where you seek out partners and build a consortium to finance an acquisition.
Note that you’ll have to give up some autonomy in how the business is run when you use search funds. It’s worth getting to know your partners well before agreeing to use this financing model.
Integration Planning
Building a clear plan for integrating the acquired business is mandatory. Developing strategies to merge cultures, communicate changes, and build a cohesive team should be started as early as possible.
If the seller is happy to put you in touch with key management personnel once the transaction is finalized, you should take advantage of this opportunity – and always ask! The better you can get to know the business’s current operational model, and the earlier you can convey your vision for growth, the smoother the transition will be.
Summary
Are you ready to get stuck into the hard grind of researching and valuing businesses?
Good. This is what separates doers from dreamers.
In my experience, it’s also one of the most rewarding parts of ETA – that moment after weeks of investigating an acquisition opportunity when you look over your findings and realize, “Hang on. This could really work.”
Learning from experience is essential for any acquisition entrepreneur. That’s why you need to sign up for ETAInsider’s newsletter.
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