What is entrepreneurship through acquisition?

Most people who want to run their own business assume they have to start one from nothing. There is another route that gets far less attention: buy a business that already works, step in as the owner-operator, and grow it from there. That route has a name, entrepreneurship through acquisition, usually shortened to ETA.

The basic idea

Entrepreneurship through acquisition is the practice of buying an established, profitable small or medium business and running it yourself. The buyer is usually an individual, or a small group of partners, rather than a corporate or private equity firm. They become the chief executive on day one and take responsibility for the business from that point on.

The idea took shape in the United States in the 1980s, where business schools began teaching it as an alternative career path for graduates who wanted to lead a company without spending years building one. It has since spread to other markets, including Australia, adapting to local finance, tax and legal settings.

In Australia, ETA tends to suit a particular kind of business: one with steady customers, a few employees, a reasonable profit, and an owner who is ready to retire or move on. They are often in unglamorous industries such as trade services, distribution or light manufacturing.

Why people choose this path

The appeal of ETA comes down to one trade. A startup offers a blank page and a high chance of failure. An acquisition offers a working business with a track record, at the cost of paying for it up front.

When you buy a business that is already trading, you usually inherit:

• customers who already buy from the business, and a history of revenue you can examine
• staff who know how the work gets done
• suppliers, systems, licences and a reputation in the market
• cash flow from the first month, which can pay your salary and service any debt

That last point matters. A founder may go a year or more unpaid; an acquirer who has bought sensibly should be able to draw a salary while repaying the funding used to buy the business. For a more detailed look at the trade-offs, see our article on buying a business vs starting one.

How an ETA journey usually runs

Every acquisition is different, but most follow a similar sequence.

1. Decide what you are looking for. Set criteria for industry, size, location and the role you want to play. Our guide to setting acquisition criteria covers this in detail.
2. Arrange your capital. Work out how much of your own money you can commit, and what a bank, the seller or investors may contribute.
3. Search. Look through brokers, online listings and direct approaches to owners. Many good businesses never appear on a public listing; see finding businesses for sale.
4. Assess and value. Review the financials, normalise the profit and form a view on what the business is worth. Small businesses are often priced on seller's discretionary earnings, explained in SDE vs EBITDA.
5. Negotiate and sign a non-binding offer. Agree headline price, structure and conditions, usually in a letter of intent or heads of agreement.
6. Due diligence. Test what the seller has told you: financial, tax, legal, operational and people matters.
7. Complete the sale. A lawyer prepares or reviews the sale agreement, and the parties settle.
8. Transition and run the business. Work alongside the seller during handover, then take full control.

Two ways to fund the search

There are two broad models.

In a self-funded search, the buyer pays their own costs while they look for a business, then funds the purchase with a mix of their own equity, bank debt and often vendor finance. They keep most or all of the ownership.

In a search fund, investors pay the searcher a modest salary and costs during the search, then provide most of the equity for the purchase. The searcher earns a share of the business over time rather than buying it outright. This model is well established in the United States and less common in Australia, though interest is growing. We compare the two in self-funded search vs search fund.

What it takes

ETA is not an easy option. It asks a lot of the buyer.

• Capital. You will usually need meaningful equity of your own, and the ability to support personal guarantees if a lender asks for them.
• Patience. Searching for the right business commonly takes many months, and many deals fall over in due diligence.
• Management ability. You are stepping into a leadership role with real staff and real customers. People skills often matter more than technical skills.
• Tolerance for debt. Most acquisitions use borrowed money. That debt has to be repaid from the business's cash flow, so you need to understand the numbers properly.
• A good team of advisers. An accountant for financial and tax due diligence, a lawyer for the contract and lease, and often a broker or adviser to help with the deal.

Australian points to keep in mind

Buying a business in Australia raises some local issues early on.

• Structure. Whether you buy through a company, a trust or another structure affects tax, asset protection and how you can bring in partners later. It is worth deciding before you sign anything.
• Asset or share sale. Most small business sales in Australia are asset sales, where you buy the business assets and goodwill rather than the company. Share sales carry the company's history with them, which changes the due diligence required.
• GST. Many business sales are structured as the GST-free supply of a going concern, but only if specific conditions are met and agreed in writing. Get this right in the contract.
• Leases and licences. The business may depend on a lease that needs the landlord's consent to assign, or on licences that do not transfer automatically.
• Employees. Staff entitlements need to be dealt with properly on transfer, and the contract should say how.

None of these are reasons to avoid buying; they are reasons to involve advisers early.

Entrepreneurship through acquisition swaps the risk of building from nothing for the work of buying well. The quality of the business you choose, and the price and terms you agree, decide most of the outcome.

Is it right for you?

ETA tends to suit people who have management experience, some capital, and a preference for improving something that works rather than inventing something new. It is less suited to someone who wants to build a product from scratch, or who will not carry debt.

How we can help

Kainos Consultants works with people buying their first business and with owners looking to grow by acquisition. We can help you set criteria, structure the purchase, review the numbers and work through due diligence. Read more about our entrepreneurship through acquisition service, or contact us for a conversation.

This article is general information only and does not take into account your circumstances. Speak to a qualified adviser before acting on it.