Growing Trend: Entrepreneurs Favor Acquisition Over Startups

A significant shift is occurring in the entrepreneurial landscape, as recent trends indicate that more MBA graduates are foregoing traditional startups in favor of Entrepreneurship Through Acquisition (ETA). This strategy enables newly minted business leaders to leap directly into high-level executive positions by purchasing established small businesses, often becoming CEOs shortly after graduation.

According to Les Alexander, a professor at the University of Virginia’s Darden School of Business, the interest in ETA has surged dramatically over the past few years. He notes that more than 15 alumni reached out for guidance on pursuing ETA this year, compared to just a few three years ago. Evidence of this growing trend is highlighted by the 2024 Stanford Search Fund Study, which reveals that a record 94 new search funds were launched last year and the total number of funds has more than doubled in the past decade.

The burgeoning interest in ETA can be attributed to several compelling factors. Firstly, graduates are eager to apply their skills as they aim to develop strategy and create culture within an organization. Moreover, the market is currently ripe for acquisition, owing to the high percentage of retiring baby boomers looking to exit their companies. In fact, 73% of business owners plan to transition out of their businesses within the next decade, representing an estimated $14 trillion market opportunity.

The appeal of ETA is strengthened further by recent reductions in interest rates, making financing more accessible for prospective buyers. Lower borrowing costs enhance the feasibility of acquisitions, thereby enticing more entrepreneurs into the market.

Regarding potential acquisition targets, Alexander emphasizes the importance of focusing on established, profitable companies with an EBITDA between $1 million and $5 million. Such businesses typically demonstrate recurring revenue—an invaluable characteristic for those pursuing ETA. For example, Edward McDonnell, who acquired Botanical Designs, successfully expanded the company from a single location to national operations through ETA.

While the ETA path offers substantial rewards, it is not without its challenges. The search for suitable businesses can be lengthy and laborious, averaging 23 months, and requires astute discernment to avoid pitfalls. Key red flags include understanding the seller's motivation, identifying customer concentration risks, and ensuring thorough due diligence of financial records. Alexander rightly states, “Failure is not failing to find a business. Failure is buying a bad business.”

Despite these challenges, the ETA ecosystem is thriving. As interest grows, institutions like Darden are witnessing significantly increased enrollment in ETA-focused courses, with demand for independent studies also on the rise. Moreover, the upcoming Southeast Entrepreneurship Through Acquisition Conference hosted by Darden and peer institutions highlights this growing interest.

The future of ETA appears promising, presenting a viable alternative for the next generation of business leaders looking to make their mark. As the landscape of business ownership transforms, aspiring executives are finding that the direct route to leadership is through acquisition rather than from the ground up.