The Acquisition Advantage

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“A pessimist sees difficulty in every opportunity; an optimist sees the opportunity in every difficulty.” -Winston Churchill

“It’s dead.”

John Gillardi was the former director of product management for Microsoft Services and the CEO of our startup, ViewPoint. He was referring to our company. “We’re out of cash, the product isn’t functional, and we don’t have any paying customers. It’s over.”

This wasn’t my first startup. Or even my first startup failure. I understood the risks—indeed, after having a previous startup fail I thought I had learned the variables that lead to a successful launch. This time was going to be different.

We had an all star team. One of our equity advisors was a CTO of a Fortune 500 company. Our largest investor was a former Fortune 500 CEO. Our own CEO had been the SharePoint consulting executive at Microsoft and had worked with customers directly in our target market. A successful entrepreneur led sales, and we had a team of proven, high-revenue generating developers. The equity raise was oversubscribed, and within months of graduating from one of the top 10 incubator programs in the world we had beta trials inside many recognizable companies. We had all the hallmarks of success. …But no actual success.

Startups have an inherent flaw: they mostly fail. Despite overwhelming talent, outstanding early product trials, and all-star team, success is still unlikely. We’ve all heard that 1 out of 10 startups fail in the first year. It’s not a secret. We all go in with two eyes open. And it appeared that ViewPoint was no exception.

The goal for entrepreneurs is to run and operate a successful business. The goal for investors is to make money by investing in a successful business. There’s just one problem–the startup phase is a company killer.

At best only half of all startups make it past this stage and those that do often come out not looking like Uber, but more like a small business. 96% of all companies that survive the startup phase never reach a million in revenue. It’s odd to me that despite the interest in entrepreneurship, we really haven’t engineered a better way to reach the end goal.

What if there was a way to do that? A “hack” to get around the startup phase altogether and run and own your own successful business from day one? What if you could grow it, run it as is, or use the cash flow to fund the creation of new products or services?

This actually exists. It is called acquisition entrepreneurship and many people are doing it right now. Basically, acquisition entrepreneurship is when you buy an existing business, instead of trying to start one from scratch, and then you combine that business with entrepreneurial techniques to rapidly grow it. There are a lot of people doing this, and they are unlocking trillions in value and living the entrepreneur lifestyle.

The main benefit of acquisition entrepreneurship is that existing companies are already established with customers, a brand, employees, and most importantly, revenue and profits—everything a startup doesn’t have. Existing businesses provide acquisition entrepreneurs with an established market, so that they don’t have to worry if they are too early or if another company with more funding and a better line up will beat them to creating the “market.” It takes so much of the risk out of entrepreneurship.

I have done this myself. Following ViewPoint’s capitulation, I bought a distribution company and used it as a platform for my own entrepreneurial efforts. The cash flow and established customer base served as the foundation to launch a new offering. We developed a proprietary eCommerce software to help companies with multiple locations gain efficiencies in their supply chain. Sort of like a private, customized Amazon for business. We rolled out our new software to the existing customers and gained over 10,000 users within a couple of months—everything we tried but failed to achieve at ViewPoint.

Over the past ten years, I’ve acquired half a dozen different companies including book printing, distribution, marketing material management, eCommerce, metal fabrication and more. All of them had hidden growth opportunities to those who could identify them and buy them right. I bought these businesses because I believed I could bring value to them. Using the assets of the companies as collateral, I used the cash flow to pay my team, build equity, create new product offerings, and build new software. I’ve also grown through add-on acquisitions, which has proven to be less expensive and more successful than driving growth exclusively through sales efforts. Existing companies can be taken over and operated as is, or as part of a bigger overall strategy.

This is what acquisition entrepreneurship is all about. It’s an approach to entrepreneurship that provides the best odds for the outcome entrepreneurs want to achieve; namely running, and owning, a successful business that they can be passionate about and put their fingerprint on.

Sound Expensive?

Buying a company is way more affordable than you’d think. In fact, acquiring a company with $1 million in revenue will cost you about the same amount of capital the average startup starts with—and not too far off the average down payment for a home in America. If entrepreneurs are investing the money anyway, why wouldn’t they acquire something already established to begin with? It’s actually a compelling question.

It’s also much easier to raise capital this way. Banks will offer leverage against the collateral the business provides, which means that you just saved one to two years of trying to raise money instead of running a business. Buying a company is, literally, bankable.

In addition, raising money from a bank means that you get to own the whole thing yourself. Or for those that need more capital or want to go really big, stretching into the middle market, there are groups of investors and private equity firms out there who support deals just like this.

There is one problem: where do you start? How do you learn to buy a business?

I got the idea for Buy Then Build in 2004 after graduating from a top MBA program. The startup a few of us launched a business in grad school that did extremely well in business plan competitions, but floundered in legal hang-ups during our last semester. I wanted to own and operate my own company, but I didn’t have a compelling idea for a startup, so I started looking for a small business to buy. I had no money and no idea where to start. There weren’t any quality resources on the subject and my world-class MBA education hadn’t offered insight into this area.

I tried meeting with business brokers to see what I could learn. Most of them rightly assumed I had very little capital to invest and tried to sell me a downward-trending bar or a laundromat. I discovered a fragmented industry with few rules, zero best practices, little reliable information, and a huge variance in the quality of available opportunities. Further, brokers and intermediaries are not terribly inclined to hold the hands of first-time buyers. Unsurprisingly, they are always looking for the biggest deals with the biggest fish.

I needed a high-quality source of information for how to acquire an existing company, but it didn’t exist. Acquisition entrepreneurship is not taught in most schools. Unless you’re one of the fortunate few, lucky enough to participate in one of the very recently developed, top-tier programs at Harvard, Northwestern, University of Chicago, or Stanford, the resources for learning this approach are limited. So I had to figure this out on my own.

I’ve been lucky enough to navigate it fairly well. I’ve acquired 6 companies over the last 10 years and made them more valuable than when I bought them. I even had a successful exit as well.

I don’t think Acquisition Entrepreneurship is right for every circumstance or everyone. This is NOT a one-size-fits-all model. But it does have outstanding benefits compared to the more traditional entrepreneurial models, and can help a lot of people reach their dream of owning and operating a business. This model of entrepreneurship is largely overlooked by the masses, but it’s uniquely positioned to be an outstanding opportunity over the next decade with trillions in value up for grabs as the Baby Boomers sell their businesses and move into retirement.

I won’t pretend that acquiring a company is not a big deal. It’s hard, it can be complicated, and like anything involving money, it’s emotional. In fact, almost everybody who starts down the path of acquiring a business never pulls the trigger. I believe the reason is that they lack a process to get them from where they are today to where they want to go. There is no compass for building a search plan, sourcing deals, evaluating intermediaries, or finding the real opportunity in an offer. Often, there are no intimately known examples of others that have done it before you. What if your analysis is short or there is a pitfall you’re not seeing?

Buy Then Build was created to solve that problem. It’s meant to be the resource that I needed when I started, so I could skip the startup phase, gain confidence, and move right into ownership of a profitable company.

This book isn’t limited to my experience alone. I’ve interviewed and incorporated experiences and research from world class institutions, investors, private equity managers, and all types of entrepreneurs.

I want this book to change how people think about entrepreneurship, and unlock the huge opportunity for more people to be entrepreneurs by leveraging the tremendous value in the existing small business economy.

But just reading about it won’t do it. You need to commit your time to taking action. You need to commit to investing your own money and betting on yourself. You need to be willing to create a business plan and pitch it to banks or other potential investors. Finally, you need to be comfortable and willing to take calculated risk. Although we’re paving the way to a greater success rate for entrepreneurs, you are still the most important part of the equation.

The book will explore the opportunity available right now, building your search process, evaluating deals, and executing. This is the roadmap for anyone with the drive to take the acquisition entrepreneur path, and buy then build their business, instead of starting from scratch.

Want to learn more? Check out Buy Then Build.

Walker Deibel

Walker Deibel

Walker Deibel is an entrepreneur and advisor. He is the author of Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game.