CHAPTER 2
Is Entrepreneurship Through Acquisition for You?
Is buying a small business right for you? We think that entrepreneurship through acquisition is an extraordinary professional opportunity—but it’s not for everyone. While it can yield professional achievement, independence, and financial success, it also takes time, energy, and sacrifice. You’ll also need a bit of common sense and business acumen. To decide, you should understand the challenges and the rewards that come with this career and what the everyday work is like.
You don’t need to have owned a company before to follow this path successfully; most of the entrepreneurs we’ve studied were first-time business owners. And you don’t need to be personally wealthy, because you’ll raise money from investors to fund your acquisition. But the career path needs to be a good fit for you. While successful entrepreneurs are certainly not all alike, there are values, goals, and skills that we’ve seen repeatedly in people who find great fulfillment in owning their own businesses. Whether this path is right for you depends on your values as well as your skills.
What You Value
There are a number of values that many of us embrace—but for potential entrepreneurs through acquisition, the question is how much you value them, and how much you are willing to give up to maintain a professional lifestyle that puts these first.
Independence
Owners of the kinds of small businesses we study love the flexibility and freedom that come from running their own business. They make decisions themselves, without having to request approval from their bosses. Want to replace a salesperson with someone you think has more energy and drive? Do it. Want to see your daughter’s afternoon soccer game? Just go. Your customers care that your product quality is excellent and that your prices are competitive; they don’t care how you did it or that you left early last Thursday. We know of people who decided to become business owners because they could run their businesses successfully while still having the flexibility to raise a family, to race cars professionally, or to teach in a religious school. Running an established smaller company usually means long hours, but often there is more control over when those hours occur. Plus, because you choose the company you purchase, you eliminate the companies where the required commitment of the owner doesn’t match your lifestyle needs.
Of course, most people would say that they value professional independence—who doesn’t like that kind of freedom in the abstract? In truth, however, people often enjoy the structure that larger organizations and bosses can bring. You’re told explicitly what to do and, often, how to do it. “Do A, then B, then C”; “hit these sales targets”; “meet this deadline”; “be in the office these hours.” It simplifies your professional life: You know what to do, and when it’s done, you can go home with little concern over what else you should have done. The structure defines the steps to success. Structure may feel limiting, but independence also brings its own stresses and responsibilities.
When you are your own boss in a smaller, nimble enterprise, you will need to be constantly reevaluating and adjusting your own goals, priorities, and processes yourself. Figuring out what to do is always at the very top of your to-do list. And though you don’t have a boss, you’ll still answer to lenders, investors, customers, suppliers, employees, regulators, and competitors. When something goes wrong, nobody will feel the pain more than you will. You’ll wonder what you could have done better. And when you go home at night, you’ll be focused on what you should have done that you didn’t do and what your priorities should be for tomorrow. It is all up to you.
The challenges of independence begin as you search for a company to buy. Each morning during your search, you will be confronted with a score of activities you could pursue: checking in with brokers, cold-calling owners, reviewing information on companies that are for sale, writing offer letters—the list goes on and on. There is no one to turn to and say, “What’s really important? What should I work on next?” It’s just you. The ability to organize yourself and focus on what is important is critical to success. So, as you consider whether the day-to-day work of this path is what you are looking for, measure your desire for independence against the challenges that come with it.
Being rewarded for what you do
One of the unique experiences of entrepreneurship—whether it comes from starting your own company or buying one—is that everything you do benefits you and your investors. Make a sale? That’s profit for you and your investors. Negotiate a lower rate on insurance coverage or delivery services? The savings belongs to you and your investors. These direct rewards can be a much more powerful motivator than praise from your boss or other organizational rewards. The high level of energy they generate for you both gets things done and sets the pace for the organization.
Direct rewards, of course, work both ways. You can end a month better off than when it began—or worse off. Most searchers and entrepreneurs report that their work involves much greater emotional oscillations—bigger ups and downs—than they had ever experienced working for others. We think this is because the direct rewards, together with being the ultimate decision maker, are an emotionally powerful combination. The good days are truly exhilarating because your work has improved the well-being of those who believe in you and depend on you—like your family and your investors. But when things go badly, it can be really depressing because you have made those you care about worse off. Entrepreneur Greg Ambrosia observed, “My job is exhilarating, but it’s also stressful; I feel very responsible to my customers, my employees, and my investors, and of course, I want the company to achieve my goals too. My friends are sometimes surprised when I tell them I experience more stress now than I did leading soldiers in combat. I think that’s because in combat, you had short periods of extreme stress followed by long periods without much. As CEO, that feeling of responsibility to get it right doesn’t stop.”
Ask yourself, Can I calmly work through these inevitable cycles? Can I learn from my mistakes and move on? Can I retain more joy from the ups than misery from the downs? To be successful, you’ll need to keep working through these emotional swings. If doing so doesn’t match your personality, then entrepreneurship through acquisition probably isn’t a good career choice for you.
Learning
Throughout your search, you’ll be continuously learning about new businesses and industries, including many that you didn’t even know existed. Because great small companies tend to be found in specialized niches of the economy, it’s unlikely that you’ll know much about the business until you start to investigate it. Once you buy a business, you’ll need to immerse yourself in it and quickly become an expert in its critical aspects while knowing at least a bit about all its functions, from marketing and production to legal and accounting.
Learning can be hard. You must be willing to make mistakes as you test your emerging understanding—even if the mistakes cost you your own time and money. You will also need to constantly base decisions on incomplete information because you simply don’t have the time to track down all the details or because the information normally available in a larger organization is absent. You’ll need to learn to approach problems intuitively and refine that intuition every day as you gain experience. You’ll learn that good decisions made quickly are often better than great decisions made slowly. If you are curious and intrigued by business and humble enough to recognize where you need to grow, you’ll love this challenge. If not, you’ll be miserable.
What You’ll Need to Do Without
We’ve seen that even the best sides of entrepreneurship through acquisition can bring with them some challenges. Indeed, entrepreneurs—and those actively searching for a small business to buy—give up many things you might presently enjoy if you have a job at a large organization. Let’s look at some of the most painful to give up—those to which you might be most accustomed.
A regular salary plus benefits
Once you purchase your small business, you and your investors will agree on your salary and what benefits you and your employees enjoy. But searching—yes, just searching—for a company to buy requires a full commitment of all your professional time (we’ll address this when we discuss the costs of the search). It isn’t something you can successfully do on nights and weekends, like restoring an old car or refinishing your basement. That means you’ll have to do without the salary and benefits from a job. What you’ll live on depends, in part, on how you finance your search. If you pay for it yourself, you’ll be living on your savings or the earnings of your spouse. If you raise money from investors, you’ll get some salary and benefits: typically around $80,000 in annual salary while you are searching. It’s enough to live on, but it gives you a strong incentive to find the right company to acquire as quickly as possible.
Working for a big brand
It can feel great to have a sense of membership in a large, quality organization that is widely recognized. You’re proud of the identity that you get from saying, “I’m with Google,” or General Electric, or Coca-Cola.
Though, as entrepreneur Greg Mazur reminds us, owning your own business comes with its own kind of recognition. He told us that when he says, “I’m the CEO and owner of Great Eastern Premium Pet Foods,” he takes pride in being the CEO and owner of his own firm.
A community of colleagues
Who do you have lunch with every day? Going to work is partly a social experience, and, in large organizations, you will often find other people who share your values, skills, and educational experiences. These colleagues become your community; they are the people you ski and golf with on weekends and the people you might see socially. In small firms, however, it’s hard to come by real peers, because everyone you deal with is an employee, a customer, or a supplier. Moreover, the gap in skills and experience is often very large between the owner or CEO and the next level of management. You will probably not find your friends at work. Of course, you can develop other social networks outside work through professional organizations, clubs, religious and charitable organizations, and so on, but that takes effort and you’ll likely be fully absorbed in running your business. This potential social isolation can be particularly troubling for owners who are unmarried. When we asked one CEO of a small business whether he was married, he emphatically told us he was very single!
Resources and infrastructure
Finally, large organizations have all kinds of resources to support their employees’ work: HR, legal, and R&D departments and plenty of capital to invest in new initiatives. The professionalism, procedures, and resources of larger organizations often mean that employees produce quality work. Smaller firms don’t have the infrastructure and resources to support the standards found in large enterprises; therefore, getting it done generally becomes more important than getting it done right. As a result, for example, new products are introduced without the benefit of market research studies (the owner uses his or her best sense of the market); salaries are adjusted without compensation surveys (the owner calls a few friends who are owners of local businesses); financials are prepared internally and are not audited (the owner’s information comes more from a daily involvement with every aspect of the company than from financial reports). As mentioned earlier in this chapter, many important decisions are made in small companies using intuition and limited data instead of careful and detailed analysis. While small-firm owners don’t necessarily seek out these situations or approaches to doing business, these approaches are often necessities. But for these owners to be successful and happy, they must be comfortable with such intuitive, less data-driven decisions.
Skills and Traits
We’ve discussed some of the values and goals that need to resonate with you if you want to succeed as an entrepreneur through acquisitions. Now let’s talk about the traits and skills we’ve seen in successful entrepreneurs.
Basic management skills
Many of the examples we highlight in this book involve MBAs from the Harvard Business School because they were our students and we know them well. But you don’t need to have an MBA to follow this path. You do, however, need some management experience or at least some business acumen. You need to have an understanding of finance basics—financial statements and principles, and the basics of modeling.
You also need to know how to lead and manage others. You need to be able to make decisions, lots of them, even though you won’t have all the information you’d like. Practicality and common sense go a long way in successfully managing a small firm. Finally, you need energy and focus, not just because leading a small firm is a lot of work but also because small firms are led from the front. The owner sets the pace and pattern, often taking on key roles such as director of sales and chief financial officer.
These basic management skills need not come from managing a business. We have seen, for example, great searchers and small-firm managers come from other career paths such as the military or engineering. Of course, not everybody has the skills to manage every business, and you’ll need to find a company that you believe you can successfully manage after a proper transition period with the seller coaching you along the way.
A convincing attitude and confidence
Great communication skills are critical to an acquisition entrepreneur. You need to feel comfortable reaching out to people you don’t know—sellers, business brokers, investors, your employees—and when you do reach out, you need to project an air of confident optimism. All of these people are deciding whether to believe in you. If they don’t sense that you believe in yourself, why should they? Of course, this doesn’t mean that you always feel optimistic or confident. But you know how to handle your worries. You need to make decisions and take action. Smaller-firm CEOs aren’t frozen by a fear of making mistakes; they know they will make some bad decisions but will adapt and fix them.
Persistence
Especially as you are searching for the right business to buy, you need to have relentless energy: the willingness to keep looking for the right business, to keep researching each company you’re interested in, and to keep negotiating again and again until you make your acquisition. When you are seeking out a business to buy, you might face months when you work 12 hours a day and simply not find a desirable prospect. It’s a frustrating experience with lots of effort and no reward. Worse, you might find a prospect that you are excited about, reach agreement on price and terms, and work for months on closing the deal, only to have the transaction fall apart at the end because the owner decided not to sell. When you’re searching, there are many frustrating days of little or no progress, some real disappointments and setbacks, and only one success that occurs at the very end of the process. Successful searchers keep working tenaciously through all the dramatic highs and lows of the pursuit and steadily advance toward an eventual acquisition.
Next Steps
A few lucky people absolutely know they want to run their own smaller firm early in their professional careers. For you, however, the decision may be complicated because whatever direction your career takes—owner of a smaller firm, manager in a large company, founder of a start-up—you’ll be likely to find only a partial fit. Maybe you want to be your own boss but value your circle of professional colleagues. Perhaps you like the idea of a hardwired connection between effort and personal reward, but don’t like being face-to-face with the risks the owner manages every day in a smaller business. Whatever your decision is, don’t hold it to a standard that is unreasonably high. Most people who become entrepreneurs through acquisition sorted through similar conflicts.
As you contemplate your choice, consider this: While there are opportunities for personal wealth in this path, don’t confuse prospects for your financial success with your satisfaction in the journey. Success is always hard to predict, particularly in a relatively unstructured career like entrepreneurial business ownership. Instead of banking on the numbers, focus on what your everyday life will be like in the different roles you are considering. Your vision of the journey is more knowable—and ensuring that you enjoy the journey will mean that the reward becomes icing on the cake.
Consider too that entrepreneurship through acquisition is, of course, the road less taken. Out of approximately 180 million Americans who work, fewer than 2% own their own businesses. But almost all of the successful entrepreneurs we know are happy with their jobs, while we know that many successful executives in big companies are not happy with theirs. And in our experience, we’ve never seen an entrepreneur who wants to return to working for somebody else in a large organization.
If you meet these qualifications—if this sounds like you—keep reading to learn more about the process of acquiring a small firm.