Becoming an acquisition entrepreneur – buying and growing an already established business – is a tried to and true path to financial success.
However, it is no simple task.
You’ll need to find the right business for you, make sure your financing is in order, negotiate an acceptable price and apply your unique insights to increase profits.
Here is a look at how to become an acquisition entrepreneur.
What is an acquisition entrepreneur?
Simply put, an acquisition entrepreneur (AE) is a person who buys and grows already established businesses. This contrasts with your more traditional career paths of either working your way up to the c-suite or launching a startup.
This so-called Third Path is often overlooked.
However, it is a very viable investment strategy. Only about 10 percent of new businesses will actually succeed.
Buying an already established business is often a much safer option.
It can also lead to a better work-life balance because a stable operation rarely requires working on nights or weekends.
How to become an acquisition entrepreneur?
Many people move into acquisition entrepreneurship later in their careers, once they have gained enough experience and have the capital available to purchase the business. However, that is not always the case.
To succeed at AE, you need basic management skills, a thorough knowledge of finance, an aptitude for leading and managing others, and a knack for decision-making.
You also need access to funding, and this can come in any number of ways:
- Traditional bank loans
- SBA loans
- Third-party investors
- Venture capital firms
How does the acquisition business work?
The business acquisition model is straightforward to lay out in theory and obviously more difficult to actually implement.
You want to search for profitable businesses that fit your individual investment thesis. Negotiate a price and ultimately buy the business. Then you want to apply your unique insights to increase profitability.
Sometimes AEs will focus on an industry where they have specific expertise.
Let’s say you worked at an HVAC company for many years, and you wanted to step out on your own. Buying an existing HVAC operation would be an ideal fit as you move into AE.
However, there doesn’t always need to be a connection. Sometimes you can apply your managerial expertise to a business you know nothing about.
Don’t rush this process. Finding the right business for you could take up to two years. You want to make sure that you get it right.
Who are the typical targets of a growth company?
Having an investment thesis is an absolutely critical component of becoming a successful acquisition entrepreneur.
It should lay out your must-have and nice-to-have criteria for evaluating whether a deal is right for you and can help you make a rational decision free of emotion.
However, many people skip this step altogether or deviate from it altogether in an effort to jump right in. This can often be a mistake.
Some things you might consider as criteria for your investment thesis:
- A business that has been in operation for at least 5 years
- A business that is doing at least 500K of SDE (Seller Discretionary Earnings)
- A business that has a diverse customer base
- A business in an industry you are already familiar with
How will you find your next client?
There are many ways to find businesses that match your investment criteria. You want to narrow down your search based on location, size of the business, industry-specific advantages, risk tolerance, etc.
Many people get into AE later in life once they have developed a large network of industry contacts, they can rely on to hear about potential acquisition targets.
You can also work with a professional like a broker. Although they get paid a fee, they can often quickly weed out undesirable companies and generally streamline the whole process.
There are also lots of websites like BizBuySell or LinkBusiness that connect sellers and buyers. Using these resources might take a little bit longer because you’ll need to evaluate several options until finding one that suits your needs.
What are the best sources of funding?
Let’s look at the various sources of funding for AE in a little more detail.
Self-funded search: The entrepreneur bears all the responsibility of finding a suitable target, relying upon a combination of personal funds, seller financing, and bank financing.
Traditional search fund: Capital is raised from investors to fund the search phase including salaries, office space, travel expenses, and due diligence costs for up to two years. Many investors anticipate preferred equity ranging from 1.5X to 3X for their investment.
Sponsored search: In this model, the AE partners with an investment firm to provide capital for both the search and acquisition. The firm will control the board of directors as the primary shareholder.
Crowd-funded search: Here the AE raises capital for the search and acquisition through crowdfunding sources, offering common shares, preferred shares, or a combination.
The path to becoming a successful acquisition entrepreneur
We’ve attempted to cover some of the steps toward becoming a successful acquisition entrepreneur.
You should have an investment thesis laying out what sort of deals you’re looking for and stick to it.
You’ll want to evaluate all your various funding options to see what works best.
Consider working with a broker or relying on your network of professional contacts. You can also use any number of online businesses selling websites.
Buying an existing, stable business is a very viable path to financial success. It is much less risky than starting something from the ground up and can generally lead to a better work-life balance.
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