What is ETA?

This is newsletter is the first in a three-part “ETA Fundamentals” series that covers the following questions:

1. What is Entrepreneurship Through Acquisition?

2. What are the key activities in ETA?

3. What are the the different ways to participate in ETA?

What is Entrepreneurship Through Acquisition?

Today the vast majority of people view starting a company as the only path to entrepreneurship. I expect this to change in the coming years as ETA becomes more well-known.

The ETA ecosystem relies on three parties: sellers / buyers / capital providers, and all three parties have positive tailwinds in coming years:

• Sellers - North America’s aging population means the majority of business owners are retirement age and will need to sell or pass on their business in the next decade or two.

• Buyers - an increasing number of people are beginning to consider ETA as a path to business ownership due to its attractive risk / reward profile vs starting a company.

• Capital Providers - Investors are deploying more dollars into small business acquisition, making to easy and transparent for buyers to get financing. This is true of both self-funded search and search funds.

There are three key parts of the ETA journey: 1) Search, 2) Acquire, 3) Operate. More on this in the next newsletter. For now I’ll leave you with some similarities between ETA and a process many are familiar with: looking to buy a house or property.

Buying a House as a Metaphor for ETA

Now that I’m a few months into looking for a business to buy, I’m noticing many similarities between buying a business and buying a house. When I was raising money for my search fund, I told potential investors: “I bought a house in the Bay Area during the low interest rate era - I can figure this out as well.”

What’s best for you depends on your goals - Some people buy a property as a passion purchase that provides comfort and stability. Others buy property to “flip” and produce short or medium-term gains, while others buy property for long-term cashflow. Buying a business is the same: it can serve a variety of goals / outcomes - be clear on the itch you’re trying to scratch by purchasing a company.

Nothing is perfect… - Every home, and every businesses, will have issues. Some will be fixable, and some you’ll have to live with. It’s all about finding something where you are a “yes” to the issues the property or business has.

…but watch out for fundamental flaws - a friend of mine purchased a house with severe structural issues and is currently in year two of litigation. Entrepreneurs like Judd Lorson have bought businesses that were fundamentally flawed. Protect yourself with thorough diligence to ensure you’re not getting a dud.

Searching for “the one” is an emotional rollercoaster - we went through multiple heartbreaks when looking for our long-term home. Every bid that fell through felt like we lost “the one,” but in retrospect there were many homes that we could have been happy with (including the one we actually purchased). When looking at businesses it’s easy to fall in love, but a cool, level-headed detachment will help with the ups and downs of the search process.

Environment matters - Macroeconomic conditions (particularly interest rates) influence the purchasing environment. All environments have their pros and cons. Be aware of the macro environment, but don’t let it drive your decision making.

Levers to maximize profit - if you’re buying a business to improve and sell down the road, the following tactics from real estate also apply:

• Buy in an up-and-coming neighborhood: the industry the company operates in is analogous to the neighborhood of the property, and a rising tide lifts all boats. Look for the tailwinds of a growing industry when purchasing a business.

• Find something you’re uniquely suited to improve: all properties / companies will have things to improve and unique skills needed to make those improvements. Value creation happens when the purchaser has the skills to address what the company needs.

• Embrace risk: the best outcomes come from thinking differently and seeing an opportunity that others miss. Software Holding Companies are now trendy and being chased by many, but when Tiny Co (the OG software HoldCo) started buying small, cashflowing software companies ten years ago, people would ask “are those even assets?” (The podcast linked to here is superb and worth listening to in its entirety.)

ETA Course

If you’re interested in going deeper on Entrepreneurship Through Acquisition, I’ll be teaching a course in November. The goal of the course is to deeply understand the different methods of participating in ETA and choose the one that’s best for you. It’s a live, cohort-based class where you’ll have a peer group to learn with and learn from.

You can learn more about the course and sign up for updates here.