Is Acquisition Entrepreneurship Right for You?

Summary: Acquisition entrepreneurship is a strategy to become an entrepreneur by acquiring a company rather than launching a startup. This strategy has gained popularity as a potentially safer way to become an entrepreneur.

This article discusses the advantages and disadvantages of acquisition entrepreneurship to help you determine if it's right for you. We cover the following:

  1. What is acquisition entrepreneurship?
  2. What are its advantages?
  3. Disadvantages of acquisition entrepreneurship
  4. Improve your chances of success

 1. What is acquisition entrepreneurship?

Acquisition entrepreneurship is a strategy to become a business owner by acquiring and operating an existing business. It can avoid many risks associated with launching a new venture and is considered a safer approach.

The target company has a track record that can be examined during due diligence. Additionally, most sellers can stay on as consultants and train the buyer how to operate the business. This combination lowers the transaction's risk and increases your chances of success.

While acquisition entrepreneurship is less risky than launching a startup, buying a business always carries a substantial risk. The following sections cover the advantages and disadvantages of acquisition entrepreneurship. It will help you evaluate if this strategy is right for you.

2. Advantages of acquisition entrepreneurship

Acquisition entrepreneurship has several advantages over launching a startup, especially for new entrepreneurs. These advantages fall into three general categories.

a) Fast track to entrepreneurship

Acquiring a company enables a would-be entrepreneur to go into business quickly. The entrepreneur skips the time-consuming process of launching a new company and scaling it to the point of profitability. Instead, they take control of a profitable business and focus on their efforts to improve operations and grow.

b) Safer investment (potentially)

A business acquisition is typically safer than launching a new company, provided you buy the right company. You can examine the company during due diligence and determine:

  • Revenues
  • Expenses
  • Cash flow
  • Profits
  • Reputation
  • Market risks
  • Opportunities

The buyer should be able to go into the acquisition with a complete understanding of the company. This process helps avoid bad opportunities. Consequently, you can focus on acquisition targets that meet your requirements.

c) Easier transition from a job

Moving from a conventional job into an entrepreneurship role is difficult and has a steep learning curve. Acquiring a company provides a smoother transaction if the buyer sets things up correctly.

Most acquisitions include a period of training where the outgoing seller provides training to the incoming buyer. This training is essential and allows the buyer to learn how to operate the business and avoid costly mistakes.

The company should also have a team and all its systems in place. These resources and the seller's training can help ensure you hit the ground running.

Lastly, you should be able to draw a salary from the business. This is an important benefit because you will not be constrained by living off your savings. This salary provides a financial breathing room while you get used to your entrepreneurial role.

3. Disadvantages of acquisition entrepreneurship

Acquisition entrepreneurship carries a substantial risk and has several disadvantages. These should be carefully considered before pursuing this strategy.

a) It is not always better than a job

Articles in the popular media typically promote acquisition entrepreneurship as a better option than holding a job. Entrepreneurship is presented as a way to escape a dead-end career while building wealth.

This perspective can be true, but only if things go well. Success is never guaranteed, and all business acquisitions carry substantial risk.

Acquisition entrepreneurship can require a major financial investment, 100-hour work weeks, and still lead to financial failure. If you are not comfortable with this, then you may be better off with other alternatives.

b) Finding the right business is difficult

Finding the right business acquisition target at the right price is very difficult. In most cases, the buyer will go through several attempts and invest a lot of time before finding the right company.

There are competing interests and expectations between the seller and buyer. Finding a match can take a long time.

Buyers want a profitable business that generates substantial free cash flows, has a good team in place, has good prospects, and is priced correctly. These requirements make perfect financial sense.

Now, consider these requirements from the seller's perspective. Why would you sell such a great business? Wouldn't you be better off trying to find a good general manager?

Let's take it a step further. Assume you are the seller of a business that meets the previous criteria. Would you ask for a substantial price premium?

c) Financially risky

Buying a small business is financially risky. Never underestimate this, or you could run into serious trouble. Let's consider a typical transaction.

Most acquisition entrepreneurs use a business loan to buy the company. A loan usually requires signing a personal guarantee and contributing a 10% equity injection.

Loans under five million dollars are often backed by the Small Business Administration (SBA). These loans come with a guarantee that buyers often misunderstand.

The guarantee protects the lender if you default on the loan. It acts as a government incentive, so they will provide loads to small companies. It does not cover you. The lender can still go after any assets covered by the personal guarantee.

d) You could buy a bad business

Buying a business involves taking a calculated risk. There is always a chance that you will end up with a bad business even if you take all the reasonable precautions.

The due diligence process is never perfect, and you may miss some red flags. There may even be problems no one could have anticipated that became clear only after taking possession of the company.

e) Harder than you think

Owning and operating a business is harder than most buyers think. New entrepreneurs often overestimate their ability to operate and scale the business successfully.

A common belief among buyers is that they will be able to run the company more efficiently than the previous owner. Consequently, they will be able to extract additional gains from the acquisition.

This may be possible if the business is underperforming and you have the correct set of skills. New buyers without these skills should ask themselves if they actually know more than the seller who has owned the business for a long time.

f) Requires broad skills

Running a small business requires an extensive set of skills. As the owner, you must be mentally flexible and have a good understanding of the following:

  • Finance and Accounting
  • Human resources
  • Employee management
  • Client management
  • Conflict resolution
  • Marketing

You must also know enough about every job function to understand it well. This includes everything from management jobs to what the front-line personnel does.

g) Finding and retaining talent is difficult

In general, finding and retaining talented employees is notoriously difficult. You don't have to take our word for it. Ask any business owner.

Retaining management team members is even more difficult as there are fewer candidates with the right skill sets. You will also be competing against larger companies that may offer more attractive compensation packages.

This is one of the reasons why finding a general manager and becoming an absentee owner is difficult.

h) Time consuming

Operating a business is very time-consuming. You may work for yourself, but you will not have much control over your time. At least not initially.

Expect to work long days. Working weekends is also common. You may eventually scale back some of your work once you have a competent team in place.

i) Survivor bias abounds (in the media)

Several articles and social media posts promote the benefits of acquisition entrepreneurship. They typically showcase buyers who acquired a small company and succeeded. Some articles go as far as promoting acquisition entrepreneurship as a way to escape a "9 to 5 job" and secure your financial future.

These articles cherry-pick their subjects and showcase stories of entrepreneurs who succeeded. There are few, if any, stories of buyers that failed. This situation creates a classic case of survivor bias.

Survivor bias is dangerous in business. It can give some entrepreneurs an unrealistic sense of their chances of success.

4. Improve your chances of success

It is impossible to eliminate risk, especially in an acquisition. The best you can do is reduce it by as much as possible until it becomes manageable.

a) Meet with a financial planner

Meet with a competent financial planner who understands your objectives and risk tolerance. Before starting the process, you should understand how the acquisition fits into your financial strategy and risk profile.

Business acquisitions typically require an equity injection, which is the buyer's contribution to the acquisition. It is typically based on the transaction cost. This cost includes the cost of the business, working capital financing, capital expenditures, and costs.

Lastly, make sure your finances are in order before starting your search for acquisition targets. You will need to provide this information if you are looking for financing.

b) Assemble the right team

Most buyers, especially new ones, try to do everything themselves to save money. While the intention is understandable, this approach is shortsighted. It opens you to substantial risk.

Buying a company will likely be the most significant investment you will ever make. You will be better off working with a team that will guide you through the process and protect your interests.

Ensure that every member has experience working with small business acquisitions. Team members can include:

  • Attorney
  • CPA
  • Quality of Earnings professional

c) Do as much due diligence as you can

The due diligence period can be overwhelming, especially for new buyers. You have only a limited period to examine the business in detail to determine if anything is amiss. Use this time wisely.

Examine everything you can and determine if the business has any serious problems. Audit the company's finances and operations. Ensure that the business you buy matches what the owner has sold you. Lastly, consider getting a Quality of Earnings (QoE) report.

d) Consider a QoE report

A Quality of Earnings report is created by a professional with expertise in due diligence. It can be an invaluable tool for buyers that provides a detailed evaluation of the acquisition target.

The examiner performs a thorough investigation to determine the viability of the business as a going concern. They also help identify potential issues, both financial and operational.

These reports can be expensive but much cheaper than unknowingly buying a troubled business. Note that reports vary in quality. Interview providers carefully and work with an experienced professional you are comfortable with.

Want to finance a business acquisition?

The first step to work with us is to submit this form. Once we review it, one of our associates will contact you to discuss the specific details of your acquisition.

Editor's note:

This information should not be considered legal or financial advice. Given the complexity of business acquisitions, this document is not guaranteed to be 100% accurate or cover every potential option. However, we make every effort to provide you with the best information. If you have comments, suggestions, or improvements, contact us via LinkedIn.

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