Entrepreneurship Through Acquisition Grows in Popularity

By Staff Writer | Published: November 6, 2024 | Category: Leadership

Entrepreneurs are finding that acquiring established businesses post-MBA allows them to transition directly into executive roles, shedding the traditional startup route altogether.

In recent years, Entrepreneurship Through Acquisition (ETA) has emerged as a compelling option for MBA graduates looking to become CEOs without the traditional route of starting a business from scratch. This strategy allows entrepreneurs to acquire and manage existing small businesses, often leading them to a top executive role shortly after graduation.

Les Alexander, a professor at the University of Virginia's Darden School of Business, has observed a significant increase in the number of alumni interested in this path. "Three years ago, I might have had only a few alumni reach out about ETA. This year, more than 15 alumni have contacted me in some way, asking how to pursue this path," he noted.

The rising interest in ETA is supported by the recent Stanford Search Fund Study, which revealed a record 94 new search funds were established last year. This surge reflects a broader trend; in the last decade, the number of new search funds has more than doubled.

Reasons Behind the Increase

Entrepreneurs find ETA appealing for several reasons:

Several factors contribute to the growing interest in ETA, including increased awareness, educational offerings, funding opportunities, and a robust market of retiring business owners seeking liquidity—often termed the "Silver Tsunami." As of now, over half of U.S. business owners are aged 55 or older, indicating a shift in small business ownership is imminent. The Exit Planning Institute reports that 73% of business owners plan to exit their businesses within the next decade, representing an estimated $14 trillion opportunity.

Furthermore, favorable macroeconomic conditions, such as recent reductions in Federal interest rates, have made borrowing for acquisitions more feasible. Lower rates reduce the financial burden on entrepreneurs, making ETA a more attractive option.

Identifying Potential Targets for Acquisition

According to Alexander, the ideal businesses for ETA are established and profitable, typically exhibiting an EBITDA (earnings before interest, taxes, depreciation, and amortization) of $1 million to $5 million. The potential acquisition pool is extensive, estimated in the hundreds of thousands of firms.

However, successfully leading a small business requires a specific entrepreneurial mindset. Alexander emphasizes, "You have to have that entrepreneurial spirit to really want to lead a small business." The best businesses are those with recurring revenue, such as subscriptions or loyal customer bases, which reduce risk during ownership transitions.

Financing ETA Deals

ETA deals are typically financed through a mixture of debt and equity. While some entrepreneurs utilize personal funds, many raise capital from a small group of investors to establish a search fund. As Alexander points out, Darden graduates are well-prepared to pursue this path due to their comprehensive education.

The Challenges of ETA

Despite its advantages, ETA has challenges. Entrepreneurs must navigate capital raising, finding the appropriate business opportunity, and managing transitions from previous owners. The process of finding the right business can be arduous; the Stanford study reports a median search time of 23 months, and not all searches yield an acquisition.

For those who succeed, the financial rewards can be substantial. Successful exits often result in equity earnings averaging $5.7 million per person, with a median of $2.25 million, and an internal rate of return (IRR) of 35.1% for search funds.

Potential Pitfalls in Acquisition

Aspiring ETA entrepreneurs need to be vigilant about certain red flags during the acquisition process:

"Failure is not failing to find a business; failure is buying a bad business," cautions Alexander.

The Future of ETA in Business Schools

The growing interest in ETA has spurred an increase in supportive ecosystems within business schools. At Darden, the number of students enrolling in ETA-focused electives has surged by 50%, with both residential MBA and executive MBA programs experiencing waitlists. This trend mirrors that of other top institutions across the United States.

As the baby boomer generation continues to retire, ETA may well become a predominant pathway for aspiring business leaders. The dream of stepping into a CEO role right out of business school is becoming increasingly attainable.