Did you know you can be your own boss without building a business from scratch? You can do this with the entrepreneurship through acquisition (ETA) model, which is when entrepreneurs purchase successful small to medium-sized businesses and take them to the next level. Sometimes called acquisition entrepreneurship, ETA can be an excellent career path for experienced or aspiring entrepreneurs who excel at leading teams and operating established companies.
ETA has been gaining traction during the past decade. Many universities and business schools have robust ETA ecosystems for students, including clubs, conferences, mentorship opportunities, or even a dedicated ETA fellows program. Business acquisition may seem at odds with pursuing entrepreneurship in a traditional sense, but it’s just another way to own and build a business. Let’s take a deep dive into how you can find and fund a business using this method.
How to find the right business to acquire
- Source and filter prospects
- Coordinate with the seller
- Do your due diligence
- Review its company culture
- Investigate their online presence
- Take an open-minded approach
Someone unfamiliar with the ETA landscape might wonder why a small business owner would sell a successful business.
There are a variety of reasons—perhaps they’re moving on to another venture or they’re facing a big life change, but it’s primarily because of hitting retirement age. Baby boomers—the youngest of whom are now in their early 60s—own 51% of privately held businesses and they’re exiting the market. This silver tsunami of older people selling their businesses has helped push the entrepreneurship through acquisition movement forward.
Searching for the right business over months—or even years—can be frustrating. On average it takes 19 months, according to the 2024 Search Fund Study published by Stanford Graduate School of Business (GSB). There is also the financial risk of losing money, as with any business endeavor. Perseverance and knowing where to look pays off. Here are some strategies you can use:
Source and filter prospects
As you start to search, evaluate whether a sector or particular business is a good fit for your knowledge, skills, and experience. Once you zero in on your area of focus, work your current network and aim to build new connections to generate an opportunity pipeline. Meeting people and talking to business owners can be fruitful and yield leads, as can cold calling.
But when it comes to finding small business sellers, nothing beats “hitting the pavement” according to Eduardo Zaldivar, co-founder and managing partner of Mosaic ETA, a private equity firm that invests in search fund entrepreneurs and the companies they acquire.
“You smile and dial, you call, you email, you visit in person,” Eduardo says, “going to conferences, showing up, knocking on doors. That’s how the vast majority of searchers acquire.”
With preliminary research, contact business owners who could be selling or have ideas about other business owners who are. Keep in touch with business owners that previously showed interest but backed off. Just because they weren’t ready to sell a while ago doesn’t mean that won’t be the case now.
There are also online resources, but Eduardo advises buyer beware. According to him, there are legitimate platforms, run by ex-investment bankers or ex-ETA searchers, and “very illegitimate” ones. He also cautions that most searchers don’t acquire companies through those platforms. Still, you may find it helpful to look online, whether via social media or signing up to receive newsletters. Some online resources include:
- ETA broker platforms
- Newsletters, workshops, or coaching
- Platforms that list businesses for sale by region, size, annual revenue, asking price, financing options, or sector
Whether you pound the pavement or search online, the undesirable businesses will be numerous and necessary to filter out. Consider it normal if only a tiny fraction of the businesses you find are worth pursuing.
Coordinate with the seller
Once you narrow in on a business worth pursuing, you can meet the seller to get a better understanding of the business. “It has to be a really tactful, respectful approach,” Eduardo says. “Sellers have a lot of options and they’ll cut you off if you’re either aggressive or disrespectful.”
He encourages searchers to try to get an informal understanding of the business’s financials within one to three meetings. “No lawyers needed at this stage,” he says. “It’s at a restaurant, it’s over a meal.” The searcher can move on if the business is not the right fit.
If the acquiring process is moving along and both parties are happy, they typically will sign a letter of intent (LOI), a binding agreement that neither party will look for another seller or buyer. “Getting the documented financials comes after the LOI, and that’s probably one to six months into the relationship,” Eduardo says. “But don’t ask for the Excel of their finances before LOI and certainly not before several months of building trust.”
Do your due diligence
You can get more granular insights into a business’s financial records after the LOI is signed, but before closing the acquisition. “Once there’s alignment overall, it is part of responsible due diligence to ask for all the documentation,” Eduardo says. He says this financial review typically takes place 45 to 90 days before the acquisition is completed.
Consider asking for:
- Proof of annual recurring revenue in the case of a subscription business
- Client base: Is it reliant on a single company or multiple customers?
- Customer retention rate
- Financial statements
- Contract terms with suppliers and employees
- Regulatory accreditation
- State of inventory
Experience company culture
Visit the business’s office or production site, go in the field, and talk with employees of the business. Access is given depending on the relationship between potential seller and searcher, and where they are in the acquisition process. Take note if the company culture is a good fit for your personality, management style, values, and lifestyle. Suss out whether the current seller’s attitude and management style resonates with your own. Attend virtual meetings if the company is fully remote to assess employee morale, or go in person if possible.
Review its online presence
If the business has a social media presence, look at its posts and engagement. Note what the business projects to the world. If the business is consumer facing, look at reviews and social media comments. Sure, some negative reviews are par for the course, but use discernment when it comes to making sense of whether they’re making their customer base happy. Search reputable publications or resources like the Better Business Bureau for any information about the business’s success or complaints.
Take an open-minded approach
The purchaser is the new owner once the deal goes through. On day one, you roll up your sleeves and become responsible for all aspects of the business, from payroll to IT and marketing. No matter how familiar you are with the same industry and a similar existing business, there will inevitably be surprises.
Listen to employees to understand how systems could be improved. Assess where to make needed change, from employee hiring and firing to updating supply chains. Stay curious and keep learning.
Funding approaches to ETA
Although ETA is a fast track business model dependent on making an acquisition, most entrepreneurs need some type of business financing during the search period and for purchasing the business. Searchers raise capital in various ways, contingent on their access to resources, investors, and the asking price of the existing company.
Self-funding
Some ETA entrepreneurs are in the financial position to purchase a business outright with their personal savings. Typically, though, a self-funded search for acquisition targets relies on both personal capital and external financing—most notably, Small Business Administration (SBA) loans. This hybrid approach lets entrepreneurs maintain more control and equity in the business compared to traditional investor-backed acquisitions.
Search funds
Search funds have become an increasingly popular ETA financing model during the past several years. University business school incubators, accelerators, and fellowships all utilize search funds. The searcher teams up with about 10 to 15 additional investors, typically a mix of individuals with personal funds and private equity investors, who also act as mentors and advisers.
The search fund pays the searcher’s salary and expenses, typically in the $550,000 range, while they search for a desirable business to buy. Once they find a suitable business, the search fund investors get the first opportunity to invest in the newly acquired business. If the deal moves forward, the investors provide another round of capital to purchase the business.
Every deal is a little different, but typically the searcher becomes the CEO, sets their salary, and gets at least anywhere from about 8% to 25% in equity. “The searcher will start out owning a smaller percentage,” Eduardo says. “If they perform over time, their percentage will increase, which aligns incentives for both the searchers and investors.”
Some CEOs create a board of advisers, others have more informal relationships with their investors who provide guidance and advice. If they sell the acquired business years later, search fund investors often make their money back, averaging a 35% return.
Private equity search funds
The structure for these is the same as a search fund, but, in this case, all the people putting up funding are private equity investors. You’re not teaming up with anyone who’s dealing with their own funds, but rather private equity firms that specialize in funding ETA entrepreneurs by using outside capital from investors.
ETA private equity firms are not the same as mergers-and-acquisitions private equity firms that purchase failing or failed businesses to reorganize and sell in a few years. The incentives for private equity funded ETA entrepreneurs are different from a big private equity firm looking to flip a failing business.
“Let’s say a private equity firm has 15 companies,” Eduardo says. “If one fails, it doesn’t matter as much because they have 14 others. A searcher has one company and it’s their entire life.” As such, the financial incentive for an ETA entrepreneur is to expand the business and keep it stable.
Independent sponsorship
This financing method is driven more by an investor group looking to make a profit, rather than the entrepreneur looking to own and run a business. In this model, the investors purchase a vetted business, or group of businesses, and then hire a CEO to run the operation or even keep the current management. In other words, it flips the script—instead of the potential new CEO finding investors, the investors find the potential new CEO.
Seller financing
Some sellers, in essence, lend the purchaser some of the funds to make the acquisition. The buyer pays off the obligation in increments, just as they would with a standard loan. The seller might also retain a small percent of the business ownership in equity.
Entrepreneurship through acquisition FAQ
What are the advantages of entrepreneurship through acquisition?
On the first day of ETA business ownership, entrepreneurs have a business with a dependable revenue stream, built-in customer base, and functioning supply chain. If you take the startup approach, it can take years to build what you’d have from the jump in an ETA scenario.
Is entrepreneurship through acquisition still entrepreneurship?
Yes. While entrepreneurs who purchase fully functioning businesses have not built them from scratch, they are fully responsible for owning and operating a business once it’s acquired.
How do you know if you should buy a deal?
Each entrepreneur has their own criteria for an attractive business to buy: geographic location, type of business, annual revenue, asking price, among many other factors. It’s rare a business for sale that checks all the purchaser’s boxes, so when it does happen, especially after a long search, a purchaser will likely know and make an offer.
