Do you want to start a business? Consider buying one instead – Here's why.


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“Less noise, more steak.”

I admire this ugly but accurate description of entrepreneurship through acquisition (ETA) by a Northwestern Kellogg School of Management professor.

While it may not be as hyped as the startup life, buying an already established and solvent business and running it your way (steak) is still entrepreneurship – it's just a different, often less risky path to get there.

ETA is gaining momentum thanks to the “baby boomer” generation. With more than half of American businesses — 52% — owned by those age 55 and older, many of whom are looking to sell their companies and head west for retirement. Combine that with a lack of succession planning (eg no family or employees interested in taking over), and this is the right time to buy.

Our industry tends to glorify one-in-a-million ideas that catch fire and make billions of dollars, forgetting that the backbone of a healthy economy consists of small but sustainable businesses. After all, small businesses generate 44% of America's gross domestic product (GDP).

I'm not here to dampen the enthusiasm of aspiring entrepreneurs who believe their idea could be the next unicorn. Instead, I believe ETA has a higher likelihood of a profitable outcome and should be considered.

Related: 4 Models for building value through acquisitions

Why ETA?

Early life is full of stressanxiety, long days and little sleep as you constantly search for new and suitable customers for your solution. Not to mention the small payout, even when you get a small influx of capital to extend your runway a little longer.

Yet countless studies show that only 10% are considered “successful”. Far fewer generate any actual level of wealth for the founders.

ETA offers a smoother path to success on a path already paved by someone else, many of whom are part of the baby boomers. According to the US Census Bureau, boomers own 2.34 million small businesses in the US, which employ more than 25 million people.

how “Silver Tsunami“Exploding industries—the massive retirement of baby boomers—there are ample acquisition opportunities across the board. These businesses are already proven in their industry, have an existing customer base, and typically have steady cash flow.

The right person can quickly take a healthy business to the next level. Instead of exhausting mental and emotional energy on something that may never cross the finish line, you're bringing fresh legs and fresh ideas to someone else's hand.

The first step in your ETA journey

To begin, you need to research to determine what financial way you want to follow. Will you fund your own research and try to pay your own way, or will you form a research fund to provide the necessary capital to help you found your business?

Basically, this choice comes down to what level of freedom you value most: the financial freedom of a two-year paid window to find the right business, or the freedom to run your business as you see fit.

Research funding gives you the capital to run, including a salary to research a business, but you give up your flexibility in time, industry and location. Self-financing provides flexibility in time, location and industry; The downside is that you have to find the money yourself.

Related: How leaders can build acquisition-ready companies

Ask for funding

As an aspiring entrepreneur, you use a search fund to assemble a team of investors to cover the costs of finding and buying a business.

These costs include a salary and other requirements to ensure that you can find and procure a profitable business deal – usually with an expiry date of two years. Additional funding from investors – and their networks – helps you buy much bigger companies than you might be able to do on your own.

While you have more financial freedom in the beginning, using a research fundyou need to help your investors find the best opportunities regardless of industry and geography. You also face the pressure and expectation of growing the business for 5-7 years and then selling it.

benefit

  • Instant access to capital and financial resources for more comprehensive research
  • Get guidance and support from experienced investors with valuable connections.
  • With the backing of reputable investors, your credibility instantly increases with sellers.

CHALLENGE

  • You have less equity in the company as a large portion goes to your investors.
  • The most important pressure to deliver can impair your ability to make the best decision.
  • Potential conflicts with investors over strategy or vision during the process.
  • It's a more complicated process with more investors to please.

Self-financing

Self-financing it's exactly what it sounds like: as an entrepreneur, you use your own money and resources to fund the research process and buy a business.

Although not everything has to come from your own pocket – borrowing money from family, networks, loans, etc. – the financial risk is much more important as you are basically putting all your chips on your ability to find the right company.

If you find and buy your own business, you have the freedom and flexibility to run it your way. You can target whatever geography or industry you want and make the company fit your needs or wants rather than investors' expectations.

Related: Why you should do everything you can to self-fund your business

benefit

  • You have full ownership of the business and can make your own decisions.
  • Choose an industry and geography that works for you, not the investors.
  • No amount of stakeholder relationship or expectation management simplifies the process.
  • You retain total capital in the business and maintain higher returns and profits.

CHALLENGE

  • You could lose a large portion of your savings if it fails.
  • You have reduced access to financial resources other than loans, which may limit your scope.
  • All important decisions fall squarely on your shoulders, with little advice or experience to make.

While the path to entrepreneurship is a little smoother through acquisition, it still requires careful navigation regardless of the path chosen.

However, this is only the beginning. I'll be back with tips for your next steps, focusing on how to find a business and what the buying process should look like.



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