Embarking into acquisition entrepreneurship is an incredible risk that offers significant financial and personal payoffs. For those with the proper disposition, a keen eye for spotting potential, and a mind for numbers, acquisitions entrepreneurship (AE) can be the adventure of a lifetime.
But how do you get started as an acquisition entrepreneur?
First of all, acquisition entrepreneurship is the process of buying and then building an existing business. The business can be small, medium, or large. The most successful acquisition entrepreneurs are those who can understand the assets of their particular experiences as well as their own personality and interests and leverage these to determine the kind of business that they will be best suited to grow.
Some people come by EA straight out of business school, some find their way to it in the middle of their lives either after spending time in the workforce or having founded their own entity, and some retire from lifelong careers only to find they are looking for another venture.
There are common pathways that all acquisition entrepreneurs follow once they have decided that this business is for them. It all depends on where you will get the capital to move on your first acquisition.
Here are the four pathways to acquisition entrepreneurship and some best practices to know if you are interested in getting into the field.
The 4 Pathways to
1. No Money Down:
This approach is uncommon, especially for first-time buyers, because it is a situation that only works in very particular circumstances. There are a few ways in which a No Money Down AE is possible.
One way is in the form of an earn-in, where the acquisition entrepreneur receives company stock in exchange for their work rather than buying in with cash. Another way is when the business owner is experiencing hardship and welcomes an equity buy-in because they can’t do it themselves anymore.
In both cases, the acquisition entrepreneur is actually working off their stake in the company.
2. Search Fund Model:
This approach is the most popular and is where an AE can have a search fund and search for businesses to acquire full time. The search is funded by investors who receive a step-up to run the search.
Searchers may sell blocks of their search fund to investors in return for preferred equity (or a “step-up”), usually of 1.5x the value, and secondly, they may receive the right of first refusal to invest further.
3. Independent Sponsorship:
There is no search fund. Instead, the seller (or an original team) will stay on with a piece of equity. The independent sponsor will raise capital around the business with the plan to grow the business and exit in 3-5 years.
4. Self-Funded Acquisition Entrepreneur:
The most beneficial approach is to be a self-funded searcher. This is where searchers do not raise capital ahead of the search and cover expenses with their personal savings.
With just a little bit of capital, acquisition entrepreneurs can enter the market and turn businesses around in a small amount of time. Baby boomers are retiring rapidly, so there are trillions of dollars that need to change hands.
This option offers searchers much better economics overall. They do not have to worry about repayments or providing investors with preferred equity, which can end up being quite rewarding. This option comes with a much higher personal risk at the outset but increased flexibility in the long term.
Traits and Experience Needed to Become an Acquisition Entrepreneur
Some have noted a shift in the profile of a typical searcher in recent years. Specifically, the age range and experience levels of up-and-coming acquisitions entrepreneurs have shifted so that folks later in life are joining the search, as well as those from non-traditional educational backgrounds.
When a business is acquired, you immediately become the boss once the deal is completed. So, basic business management skills are a requirement. But there are also necessary personality traits that are also required, such as:
- A commitment to ongoing learning and,
There is also a time commitment of at least six months to conduct a search and find a business that would be right for you to acquire. Sometimes early searches can stretch out to as long as two years. As a result, it is important that the people in your life are equally prepared for the time commitment and stakes involved.
What to Consider in your Search
At the end of your search phase, you will hopefully come out with at least one star candidate for acquisition. It is at this time that you will have to start exploring some deeper questions about the company. Considerations might include:
- Inherent Value: What does this business bring to the table that cannot easily be reproduced or duplicated?
- Opportunity Profile: Is this company going to be one to hold onto that is eternally profitable, or will it be best for a quick turnaround? Does it have high growth potential, or is it a platform that speaks to your particular talents?
- Path to Growth and Personality: What is needed to grow this business, and are you capable of being the person to carry out that growth?
Negotiating a Good Deal
The ability to negotiate is a critical asset in acquisition entrepreneurship, but the good news is that it is a skill that can be learned.
But negotiation is not all charm and charisma. Once your offer is accepted, you will enter into a phase called Confirmatory Due Diligence, where the company’s records become fully available.
This is the phase during which an acquisition entrepreneur must test the claims of the seller. Is this a healthy business? Are the reported numbers correct? This is a time to pour over historical financial records to make informed future performance forecasts.
If you are ready for the adventure of a lifetime in acquisition entrepreneurship, consider looking into Buy Then Build and one of our two online courses, which will help prepare you with more insider knowledge and experience.