What is Entrepreneurship Through Acquisition?
by Fundid on Jun 24, 2023 8:00:00 AM
Entrepreneurship is a challenging but fulfilling journey that requires passion, persistence, and hard work. However, starting a business from scratch can be a lot for one person, especially if you lack experience, capital, or a proven concept.
Thankfully, there is another way for aspiring entrepreneurs to become business owners without reinventing the wheel: entrepreneurship through acquisition. In this guide, we will define entrepreneurship through acquisition, explore its benefits and challenges, and provide you with practical tips on how to start your journey as a business owner.
What is Entrepreneurship Through Acquisition?
Entrepreneurship through Acquisition (ETA) refers to the process of buying an existing business rather than starting one from scratch. This approach allows entrepreneurs to bypass the early stages of business development, such as market research, product development, and customer acquisition, and focus on improving an established business's operations, culture, and profitability. ETA can be achieved through various methods, such as:
Buying a small business with owner financing
Many small business owners are willing to sell their businesses to the right buyer if they can provide a reasonable down payment and make monthly payments over time, often at a lower interest rate than a bank loan.
Finding a distressed business
Some businesses are struggling due to mismanagement, outdated practices, or external factors, such as the COVID-19 pandemic. These businesses can present opportunities for savvy entrepreneurs to turn them around with the right strategy and resources.
Partnering with investors or lenders
Some entrepreneurs may not have enough capital to buy a business outright, but they can partner with investors or lenders who provide equity or debt financing in exchange for a share of the business or a return on investment.
Related Reading: How to Use an SBA Loan to Purchase an Existing Business
6 Benefits of Entrepreneurship Through Acquisition
ETA offers several benefits that can accelerate your path to business ownership and success compared to starting a business from scratch:
1. Proven Concept
You can buy a business that has a proven product or service, target market, business model, and revenue stream, which reduces your risk and uncertainty in the early stages of business development.
2. Faster Growth
Another benefit of entrepreneurship through acquisition is that it can help you to achieve faster growth than would be possible if you were starting a new business from scratch. This is because an existing business will typically have more established systems and processes in place than a new business, which can help you to save time and money as you scale up your operations.
3. Experienced Team
The existing employees of a business can provide valuable expertise, skills, and knowledge that can complement your own and help you achieve your goals faster. This can be extremely helpful if you are looking to quickly grow your business, as you will not have to spend time training new employees on the basics of your company.
4. Faster ROI
By buying an existing cash-flow positive business, you can generate revenue and profits immediately, rather than waiting months or years to break even or turn a profit in a startup.
5. Lower Cost of Entry
Buying a business can be more cost-effective than starting a business from scratch since you can avoid or reduce some of the upfront expenses, such as equipment, inventory, marketing, and legal fees.
6. Established Brand and Reputation
Many businesses have loyal customers, suppliers, and employees who trust and recognize the brand and reputation of the company, which can be leveraged to expand the business or enter new markets.
What are the Challenges of Entrepreneurship through Acquisition?
ETA also poses some challenges that you need to understand and overcome to succeed as a business owner:
Finding the Right Business
Not all businesses are suitable or available for sale, and not all sellers are willing to negotiate reasonable terms or disclose all the relevant information about the business.
Financing the Purchase
Buying a business can be costly, and you may need to secure financing from multiple sources, such as a bank loan, seller financing, investor equity or debt, or personal funds.
Managing the transition
The process of buying and integrating a new business can be complex and time-consuming, requiring you to balance multiple priorities, such as retaining existing customers and employees, improving operations and profitability, and adapting to new challenges and opportunities.
Adapting to a different culture
Each business has its own culture, norms, and values, which may differ from your own or those of your team. It can take time and effort to understand and align with the business culture and leadership style.
Dealing with uncertainty
Even if you buy an established and profitable business, there is no guarantee that the market, competition, or external factors will not change, requiring you to adapt or pivot your strategy.
How to Start Your Journey as a Business Owner?
If you are convinced that ETA is the right path for you to become a business owner, here are some practical tips to get started:
- Define your goals and criteria: What kind of business do you want to buy? What industry, location, size, and culture do you prefer? What are your personal and financial goals for the business? By answering these questions, you can narrow down your search and create a clear vision of your ideal business.
- Conduct thorough research: Once you have identified potential businesses to buy, you need to perform due diligence to evaluate their financial, legal, operational, and market performance. This stage requires expertise in accounting, law, marketing, and industry analysis, or you can hire a consultant or broker to help you.
- Secure financing: If you don't have enough personal funds to buy the business, you need to explore different financing options, such as bank loans, SBA loans, seller financing, or investor funding. Each method has its own requirements, terms, and risks, so you need to compare and negotiate carefully.
- Negotiate the purchase agreement: After you have found the right business and secured the financing, you need to negotiate the terms of the purchase agreement, including the price, the assets, the liabilities, the warranties, and the contingencies. You may need to involve legal and financial advisors to ensure that the agreement protects your interests and minimizes your risks.
- Plan the transition: Once you have closed the deal, you need to manage the transition phase, which can include transferring ownership, retaining employees and customers, integrating systems and processes, and setting new goals and KPIs. This stage requires strong leadership, communication, and collaboration skills, as well as flexibility and resilience.
Start Planning Your Business Acquisition!
So, now that you know the basics of how to initiate your journey into business acquisition, you're closer to reaching your goal. Remember to be strategic and find a business that suits your needs and interests. Additionally, connecting with local bankers, attorneys, and other entrepreneurs can help make the transition smoother.
With the right preparation and guidance along the way, you'll soon be on your path to becoming an entrepreneur. If you would like more advice on how to finance your business adoption and continue to grow & develop it after acquiring it, subscribe to our newsletter for insider tips.