Buy your way into wealth
Photo by Austin Distel on Unsplash
Successful entrepreneurs need to take risks, work hard, and be determined. They are often exposed to all aspects of the business, dealing with various responsibilities—especially those who are founders.
But for entrepreneurs of the future, that may be different.
A new approach for entrepreneurs is sweeping through the country.
Entrepreneurship through acquisition (ETA) will be a way for young, business-minded individuals to find success in the future.
What is Entrepreneurship Through Acquisition?
Entrepreneurship through acquisition refers to buying and growing a small business.
As opposed to building a startup from nothing, entrepreneurs buy an existing business.
The main attraction of this new entrepreneurship model is that it lowers risk. Most new businesses fail; in fact, 90% fail in the first year.
Not only does it decrease risk, but it also comes with an existing cash flow. Since you arebuying a business, revenue is already being generated.
There are several characteristics to look for in an ETA target.
- $1.5mm — $15mm in annual revenue
- Operating history of more than seven years
- Healthy EBITDA margins
- A good reputation or brand with loyal customers and ideally one advantage (ex. pricing, location, etc.)
What's the Challenge?
By now, it's dawned on you that no one will hand you a business for free. While ETA is less risky, there is a reason for that. It's already established and generating revenue from day one.
Meaning you will have to pay a decent amount of money to own it.
But there are many ways to acquire the cash needed.
Only some of the cash to buy the existing business will come directly from you. The SBA (Small Business Administration) will do almost anything to help you with your small business.
Let's say you want to buy a business with an annual EBITDA of $150,000. You negotiate a selling price of 3x EBITDA, $450,000.
You would put up $45k and acquire an SBA loan for $450,000. In this scenario, you are only putting up 10% using your own capital at the time of purchase.
Even more, that $45k can come from others than just you. You can go to investors to help cover the cost. Investors may also provide more money, meaning you can take a smaller SBA loan.
There is a multitude of ways to acquire capital for an acquisition.
It's also worth mentioning debt is a double-edged sword. In life, it should be avoided atmostcosts. But there is a long list of entrepreneurs who used debt to their advantage to grow their businesses and fortunes (Phil Knight with Nike, John Rockefeller with Standard Oil, etc.)
Is ETA Worth It?
I believe it is. ETA has become a common practice in the last few years but will become even more common in the next decade due to a significant demographic shift.
There aremore than 30 million small businesses in the U.S. Of which baby boomers own more than 40%. Nearly 60% of the baby boomers do not have a succession plan.
Optimistically, there are ~7 million small businesses with no future ownership plans in the coming years.
That means one of three things will happen to these small businesses.
- It will close, and a young, new entrepreneur will fill the void by creating an innovative product.
- Private equity will buy the business (but PE firms have a minimum revenue threshold that most of these small businesses will not meet).
- The small business gets acquired, and a new entrepreneur is born, stepping into an established, cash-generating company.
Acquiracompared three career paths: a corporate career, founder, and ETA entrepreneur. By year five, the ETA route yielded the highest net worth.
There's opportunity out there; who will capitalize on it?
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