Two Approaches to Acquiring your way into Entrepreneurship

One of the most common misconceptions to start a business, is to have a billion dollar idea. Unicorns (firms) that are valued at billion dollar or more are far and few in between. Hence, the classification of businesses as small, medium and large or SMB for short. According to Gartner, the definition of SMB business are as follows:

  • Small Business: Have less than 100 employees and generate less than 50 million in annual revenue.
  • Medium Business: Have less than 999 employees and generate more than 50 million, but less than 1 billion in revenue.
  • Large Business: Have more than 100 employees and generate more than a billion in revenue.
Being pragmatic, we know that no business will start as a billion dollar business. To prevent or dispel the notion of having to start a business based solely on a billion dollar idea, the alternative is acquisition. Here are few notable thoughts on the matter.

The search-fund model:

A hidden gem in the world of business, search fund is as an investment model through which investors financially support an entrepreneur’s efforts to locate, acquire, manage and grow a privately held company. Conceived by H. Irving Grousbeck, a Stanford professor, search-fund model was designed for entrepreneurs, who want to be business owners, but don’t have the desire or idea to go after a bootstrap startup. 

According to a 2016 report, the median search fund spends 19 months looking for and acquiring a company, while raising approximately $426,000 of initial search capital. The fund searches for a high-growth, high-margin business, valued at $5-20 million. The average hold period for a search fund investment is seven years, and the most successful search fund deals have been held for more than ten years.

Ads help us serve our growing community.

Finance an Acquisition Using an SBA Loan:

The Small Business Administration (SBA), is a federal agency that helps small business' get loans. SBA loans are competitively priced, whilst enforces responsible lending and risk management, so lenders can afford to charge lower rates and fees. SBA though does have certain eligibility requirements, including:
  • Your business must trade in the U.S.
  • You must have invested in the business yourself.
  • You must be a for-profit business.
  • You must have tried but been unable to source funding from traditional lenders.
How acquisition is different than startup?

A founder owns the idea and they spend many sleepless night cultivating the idea. As the idea blossoms, so does the emotional attachment. A founder may become myopic to the surroundings and competitive landscape. Also, if idea is getting externally funded, the founder can potentially lose control of the company they built from ground up - happened to Steve Jobs at Apple in 1985.

With acquisitions, the CEO, at least at the onset is not polarized by the existing culture and decisions are not biased. Therefore, the incoming CEO may be just the jolt of energy that the firm is looking for. New ideas may flow quicker and getting implemented faster, leading to competitive advantage and growth. At the end of the day, no CEO or business owner wants flat sales, growth is always top-of-mind.

Post a Comment