Do you want to be a CEO without the traditional corporate climb? Do you have a passion for operating a business and helping it thrive? Are you attracted to the concept of entrepreneurship but just can’t quite think of a business to start?

Then Entrepreneurship-through-Acquisition (ETA) might be something for you.

View of Georgetown University Campus from The Georgetown University McDonough School of Business. Source: Author’s
View of Georgetown University Campus from The Georgetown University McDonough School of Business. Source: Author’s

What is that?

ETA is a way to become an entrepreneur by buying and growing an existing business instead of starting one from scratch. We often think of entrepreneurs as founders of great businesses, think here of Jim Sinegal and Jeffrey Brotman opening the first Costco store in 1983, or the legendary Gustavus Swift founder of the meat-packing empire in the Midwest (today owned by JBS USA). But founding a business is not the only way to be an entrepreneur, acquiring a small business is an alternative path!

A notable example in the food and beverage space is Howard Schultz who in 1987 purchased Starbucks when it had 6 stores in the Seattle area. Schultz’s leadership transformed the company into the 37,000 stores worldwide affair that Starbucks is today. It is worth noting that Schultz was CEO until 2000 and has had different stints at the helm since then.

Today, premier business schools in the U.S. hold annual conferences (See here Harvard’s upcoming conference on Oct. 19, 2024) where hundreds of “Searchers”, along with search fund investors, faculty, and other professionals in the entrepreneurship through acquisition (ETA) community to explore this rapidly growing market. A little bit of vocabulary before we proceed, “Searcher” is the colloquial term to describe an entrepreneur looking to buy a small business.

I ventured out north recently to attend the 2024 Southeast Entrepreneurship-Through-Acquisition (SEETA) Conference held at the beautiful campus of Georgetown University in Washington DC. In their own words “SEETA is designed to educate, encourage and equip current and recent MBA students and mid-career professionals in the Southeast United States to pursue the acquisition and operation of a small or mid-sized business (SEETA Conference 2024).

I could tell you more of what I learned, but instead, I thought I’d introduce you to a Searcher in a Q&A below. Keval Shah, whom I met at the conference, has left a promising career in Finance to be full-time searching for a small business to acquire.

Keval, it was a pleasure to get to meet you at SEETA and to learn more about this exciting moment in your professional career. Please tell us a bit more about yourself and your background.”  

Keval: I grew up in Africa in a first-generation family business, where my parents ran a building materials retail store. At a young age, I was involved in the shop, handling various tasks during weekends and school holidays. This early exposure to entrepreneurship instilled a strong business acumen in me. However, my parents encouraged me to pursue a professional degree like many small-business owners' parents do. Unfortunately, much of the education system teaches people to be good employees rather than teaching entrepreneurship. Kudos to you for teaching this topic! So, back in high school, I moved to Canada for my education. I built a career in Financial Services, particularly spending time in New York City, where I managed a global team and helped scale that business by 300%. These experiences provided me with essential skills in risk management and leveraging technology to grow, which are crucial for acquiring and running a small business.

What led you to decide to pursue the entrepreneurial route? Was it always clear that it would be through acquiring a small business?

Keval: We hear so much about the sexy Silicon Valley start-ups so initially, I was fascinated by the idea of working for a startup where I would have more autonomy. However, I realized that I didn’t have any technical skills, such as coding, to pursue that route. Additionally, startups have high failure rates—around 50% within the first five years—compared to established businesses.

As to how I got here, working in the corporate world, most people will encounter significant bureaucracy and unproductive meetings, which can become frustrating. I was lucky to work for a great manager who gave me a lot of autonomy so I’m grateful for that, however, I knew deep down that I wanted to create value for myself rather than a large public company.

Two years ago I discovered this concept of Entrepreneurship through Acquisition (ETA) on Twitter and reading Walker Deibel’s "Buy Then Build" was a pivotal moment for me. Learning about the SBA program (SBA is The U.S. Small Business Administration), which can finance up to 90% of a business acquisition, made ETA an attractive and viable option that aligned with my financial expertise and entrepreneurial goals.

What are you searching for?

Keval: Over the past year, I’ve focused on understanding ETA deeply. There are two main models: traditional search funds and self-funded search. As a mid-career professional with some savings, I chose the self-funded model for greater autonomy and the ability to target specific types of businesses. After relocating to North Carolina from New York, I found the region’s pro-business climate appealing. My search criteria revolve around 3 main factors: the size of the business (measured by EBITDA, Seller’s Discretionary Earnings (SDE), and purchase price), geographic location, and industry type. Specifically, I’m targeting established businesses in Central and Eastern North Carolina with a trailing EBITDA of $750,000 to $1.25 million. This typically translates to a purchase price of $3 million to $5 million, based on industry multiples. My goal is to acquire and operate a business large enough to provide substantial returns without simply buying a job, ensuring the investment is worthwhile.

Can you describe to us how one goes about purchasing a small business? What are the steps and general timeline?

Keval: The process involves several key steps:

  • Define Your Criteria: Determine what you’re looking for in terms of size, location, and industry. This is very personal and important to figure out early.
  • Search for Businesses: Use platforms like BizBuySell.com to find businesses for sale listed by brokers.
  • Sign NDAs: Protect confidentiality by signing Non-Disclosure Agreements for businesses of interest.
  • Conduct Preliminary Reviews: Examine financials, sales data, customer concentration, and meet the seller to identify any red flags.
  • Assemble a Professional Team: Engage an M&A lawyer, CPA, lender, and possible investors. Depending on the business, you might also need insurance, HR, tax, and tech consultants.
  • Build a Financial Model: Assess whether the business meets your return targets and satisfies lender requirements.
  • Submit an Offer: Understand valuations and negotiate terms, including price, seller financing, transition periods, employee retention plans, and non-compete clauses.
  • Submit an LOI: If the seller accepts, proceed with thorough due diligence, typically lasting at least 90 days, to verify all aspects of the business. This is where your team comes in.
  • Close the Deal: Finalize the acquisition and begin the transition phase, focusing on learning and maintaining stability during the initial period.

Overall, the process can take several months, with due diligence alone often requiring around three months to ensure all aspects of the business are thoroughly vetted. You have to protect yourself as the buyer and feel free to walk-away at any point if things don’t seem right.

In the absence of the savings necessary to acquire a small business, what other options are out there?

Keval: The typical self-funded search model involves an 80/10/10 split: 80% SBA 7a financing, 10% searcher equity, and 10% seller financing. The 10% equity can come from personal savings or investments from friends and family / outside investors. There is a network of investors that specialize in self-funded search deals.

Give us some flavor of what is the “home run” of searching, acquiring, operating, and successfully exiting a small business. What is desirable in what you’re looking for?

Keval: It depends on the individual entrepreneur. Some aim to buy and grow a business indefinitely, while others plan to sell it in 5-10 years. If done right, this model can be very lucrative, potentially earning a searcher >10x on their invested capital. But remember, it’s a leveraged acquisition, so the risks are real. The SBA requires personal guarantees, meaning all your personal assets are at stake if things go south. However, SBA loan default rates are pretty low—under 5%. Most failures happen in high-risk industries like restaurants, which I steer clear of. The home run is finding a stable, revenue-generating business that aligns with your goals and managing it well to maximize returns while having autonomy.

What kind of skills and characteristics—the intelligence and emotional quotient— does a successful searcher, acquirer, and business operator ought to have? Or ought to consider working on?

Keval: Success in the self-funded model requires a combination of technical skills and emotional intelligence. Key characteristics include:

  • Communication Skills: Building trust with sellers and effectively managing relationships with employees.
  • Emotional Intelligence: Understanding and empathizing with owners/employees who have invested years into their businesses.
  • Problem-Solving Abilities: Addressing and overcoming various operational challenges.
  • Adaptability: Being open to learning and evolving without the structure of a traditional corporate environment. There is no manager or HR department to provide mandatory training.
  • Resourcefulness: Leveraging available resources and networks to navigate the acquisition and operation phases.

If you lack specific skills essential to running a particular business, partnering with or hiring individuals who complement your strengths is crucial. Continuous learning and self-improvement are also important, as small business ownership doesn’t come with formal training or a hierarchical support system. The early stages often involve solving problems and maintaining resilience in the face of challenges.

In our conversation, you mentioned that you have used generative AI to aid you as an entrepreneur. Can you tell us some more about how has it been helpful in your Search?

Keval: AI has been a valuable tool throughout my ETA journey. For example, I use ChatGPT to analyze and summarize industry and business-specific data, helping me identify potential risks and opportunities. It also assists in converting financial documents from PDF to Excel, facilitating more efficient financial modeling. Additionally, AI helps with tasks like proofreading and improving the clarity of my communications. It is great for a lot of administrative tasks.

If ETA has picked your interest, contact Mario Ortez, Collegiate Assistant Professor of Agribusiness and Entrepreneurship with the Kohl Centre in the Department of Agricultural and Applied Economics at Virginia Tech. We would be happy to connect you with some great resources that would be helpful if you would like to pursue the ETA route.

We thank Keval for sharing his wisdom with the Hokie nation and wish him the best of luck in finding what he is searching for. Follow Keval on LinkedIn.

Resources

Media contact: Melissa Vidmar: Communications, Marketing, and Partnerships Manager