Acquisition Entrepreneurship: What it is and Why Modern CEOs Should Consider it?
Although many seek the glory of launching a startup and seeing it through to profit, the simple fact is that the overwhelming majority of these endeavors will fail. Another path to success is acquisition entrepreneurship.
Instead of launching your own plumbing company, for example, you can simply purchase an existing operation. The idea is to grow and scale up that business. It’s an often overlooked entrepreneurship model.
This is also an ideal time to think about acquiring a small business as many owners of the baby boomer generation are nearing retirement and open to the idea of selling.
Top Reasons for a Failing Small Business
Before examining, acquisition entrepreneurship, let’s first look at some of the top reasons many small businesses fail.
According to an analysis of over 110 startups, the top cited reasons were running out of cash and/or being unable to secure financing or investor interest. Sometimes they are up against more established competitors who have a larger war chest.
Another oft-cited reason for failure was the simple lack of a market need. The idea might sound terrific on paper but if there isn’t a specific market fit, there is no way to achieve success no matter how much cash you have on hand.
Outside factors can also affect market need. The Covid 19 outbreak for example had a tremendous impact on dining services or wedding dress companies as the need for these services vanished amid pandemic restrictions.
Even if you have a good product and access to cash, a flawed business model can also doom many new businesses. This can include having too broad of a target as well as being unable to make money at a small scale.
Other important factors in failing small businesses include:
- Stiff competition
- Regulatory or legal challenges
- Pricing/cost issues
- Wrong makeup of key team members
Advantages of Small Business Acquisition
Now that we’ve gone over why startups fail, let’s take a look at the advantages offered if you instead choose to purchase an existing small business.
Important resources not available to a startup
One of the primary benefits you gain is access to a whole host of resources that are simply unavailable to any new business.
The biggest advantage is any existing company already has a customer base as well as brand awareness.
You are also purchasing a team of employees who are knowledgeable in their field. If you want to start an HVAC company, there is no need to find and train workers if you simply purchase a new company.
Stepping foot in a seasoned market
Market need was one of the main factors in the failure of a new business. With acquisition entrepreneurship, you will be entering an established market thereby negating many of those risks.
This also removes the anxiety of getting to market too early or being beat by a more established competitor or one who gets to market ahead of you.
You’re also avoiding the problem of taking a product to market only to learn that no such need really exists or the need is not as great as you had anticipated.
Innovate an existing model
Another advantage to acquisition entrepreneurship is taking an already successful company and applying your unique insights to expand into fresh markets.
Many business owners become stuck in their ways over the years and may be restricting growth opportunities.
You can leverage the existing customer and employee resources along with new technology or strategies to maximize profit.
A Plan for Acquisition
Now that you have a better sense of acquisition entrepreneurship, let’s take a look at what the process actually looks like. How do you find the right business to buy?
What makes an ideal candidate?
The first step is to narrow down exactly what sort of business you are looking to acquire. Let’s say you want to purchase a roofing company, what factors should you look for?
A good rule of thumb is to look for a business that has been operating for a minimum of 10 years and between $1.5M and $15M annual revenue.
You are also looking for an operation that has a loyal customer base and outstanding reputation and brand.
You can begin your search on your own by perusing sites like bizbuysell.com or linkbusiness.com or by reaching out to any industry contacts you have. You can also consider working with a broker you can narrow down your search significantly.
Acquisition research and due diligence
Once you’ve found a suitable candidate, you are going to want to conduct as much research as you can.
You will likely sign a nondisclosure agreement with the owner so you can review financial data over the past several years as well as an overview of all employees. Examine their existing customer base and be sure to learn of any tax liabilities of any other claim against the business.
You can also consult any publicly available resources like SEC filings or even online reviews of the company.
Closing the deal
What does it actually look like to move from concept to execution when buying a small business?
There are several formal steps towards closing a dealing, including providing a letter of intent stating you intend on purchasing once you’ve done your due diligence before moving towards a final purchase agreement.
Make an offer based on what kind of multiples of EBITDA ( earnings before interest, taxes, depreciation, and amortization) are commonplace in that industry.
Also consider creative financing options when acquiring a small business.
Some owners will consider a reduced upfront price in exchange for longer term payments from the company’s profits. Or seek outside investors.
You may be able to provide only 30 per cent of the purchase price.
This article has offered a brief overview of acquisition entrepreneurship – a viable option for those looking to buy and grow an established small business.
It might take awhile to find a business that fits all of your criteria and meshes with your own personal qualifications but it is an essential option to consider.