Acquisition Entrepreneurs

What is an Acquisition Entrepreneur?

An acquisition entrepreneur is an individual who purchases a majority stake in an established business, then takes over as the CEO to grow and operate the business. Many business owners prefer to sell to acquisition entrepreneurs when possible because it allows them to work directly with the future CEO of their company, while ensuring a smooth transition for their employees.

There are several types of acquisition entrepreneurs.

Search Funds

A traditional search fund is a special type of acquisition-focused fund run by an individual "searcher", often a MBA graduate from Stanford, Harvard, Booth or Kellogg. The individual raises capital from private equity partners with the goal of acquiring, operating, and growing a single business. Because they are backed by private equity, traditional search funds typically look to the higher end of small businesses, with valuations from $10m to $100m.

Self-funded Searchers

Self-funded searchers are similar to traditional search funds, with the exception that their capital comes from their personal wealth or debt instead of private equity. This means they are typically more price-sensitive and will target companies with valuations below $10m, since the maximum value of a SBA backed 7(a) loan is $5m.

Holding Companies

Often referred to as "Holdcos", holding companies are similar to search funds. Instead of acquiring and operating a single company, however, a Holdco aims to acquire multiple companies in the same industry, hire experienced management, and leverage economies of scale to grow the valuation of the entire portfolio. Holdcos are diverse and can acquire companies from $1m to $50m+ in enterprise value.

Employees

A common method of exiting, particularly for business based on a trade, is to sell it to an experienced employee. Employees know the most about the business and are motivated to act in the best interests of the employees. Unfortunately, they usually lack the capital required to finance the purchase and require either outside investment or debt to bridge the gap, and it will be challenging for them to finance any transaction greater than $5m.

Individuals

Although rare, some individuals do acquire and operate companies and don't fall into the above buckets. Typically these individuals are looking for micro SMBs worth $1m or less so they don't run a typical search process and may simply be taking over from family, or

Selling your business to an acquisition entrepreneur

Compared to other buyers, acquisition entrepreneurs are unique and selling to an acquisition entrepreneurs has its own set of tradeoffs.

Business type

Since acquisition entrepreneurs usually step in as the CEO themselves, they are quite picky with both the industry and geography of the business. Many prefer businesses in their home state, and industries that have predictable revenue.

Price

It used to be the case that acquisition entrepreneurs could not pay as much as Private Equity Groups (PEGs) because they had to raise debt to finance the purchase. Recently, search funds started by MBA graduates have exploded in popularity and these searchers can pay well since they raise their funds from the same sources as PEGs. For most acquisition entrepreneurs however, raising capital from private equity is not an option and they are constrained to using personal funds and debt, which means most cannot pay more than $5-10m for a business.

Time-to-Close

Compared to PEGs and strategic buyers (e.g. competitors), acquisition entrepreneurs are more agile and can move faster on due diligence. Many will be able to close in as little as 30 days, but probably average around 90 days.

Transition

When selling to acquisition entrepreneurs, owners will be able to meet the purchasing entrepreneur long before an agreement is reached. When selling to PEGs and strategic buyers, owners rarely get any input into what happens to their business afterwards, so it can be rewarding to personally choose the individual who will be taking over day-to-day operations of the business and build a relationship with them.

Acquisition entrepreneurs often prefer the seller to stay on for a period of at least 12 months to help with the transition.

Conclusion

Selling your business to an acquisition entrepreneur can be a great option if you're the owner of an attractive, profitable businesses and want to find a balance between getting a good price, preserving your legacy, and doing right by your employees.

Dealwise has the largest network of acquisition entrepreneurs looking to deploy capital to acquire small businesses across the US and Canada. Contact us below to get a free valuation and learn what your business could sell for in today's market.