Buy Then Build

Key Takeaways

1. Acquisition Entrepreneurship: A Better Path to Business Ownership

Startups have a little flaw: they mostly fail.

Acquisition entrepreneurship offers a compelling alternative to starting a business from scratch. By purchasing an existing company, entrepreneurs can bypass the risky startup phase and immediately step into the role of CEO with established revenue, infrastructure, and customers. This approach provides:

• Lower risk: Established businesses have a proven track record and existing cash flow
• Immediate platform: Infrastructure and systems already in place
• Faster path to profitability: Revenue from day one, rather than burning through capital
• Leverage: Ability to use bank financing to maximize return on investment

Acquisition entrepreneurs can focus on growing and improving an existing business, rather than building everything from the ground up. This model combines the best aspects of entrepreneurship and investing, allowing for both operational control and financial returns.

2. The $10 Trillion Opportunity in Baby Boomer Business Transitions

The boomers are already selling off their established, successful small businesses at record rates.

A massive wealth transfer is underway as baby boomer business owners retire. This demographic shift creates an unprecedented opportunity for acquisition entrepreneurs:

• 12 million businesses owned by baby boomers (43% of all small businesses)
• Estimated $10 trillion in business value changing hands
• Increasing supply of available businesses likely to create a buyer's market

Key factors driving this opportunity:

• Aging population: 77 million boomers retiring between 2013 and 2029
• Lack of succession plans: Many owners don't have children interested in taking over
• Desire for liquidity: Owners looking to cash out for retirement

This wave of transitions provides a unique chance for the next generation of entrepreneurs to acquire established, successful businesses at potentially favorable valuations.

3. Engineering Wealth: Understanding Business as an Investment Vehicle

If you change the way you look at things, the things you look at change.

Business ownership as wealth-building tool : Acquiring and operating a business can be one of the most effective ways to build personal wealth. Key considerations:

• Return on Investment (ROI): Calculate potential returns based on purchase price and earnings
• Margin of Safety: Look for businesses with intrinsic value greater than purchase price
• Upside Potential: Identify opportunities for growth and improvement

Financial metrics to analyze:

• Seller's Discretionary Earnings (SDE): Total pretax cash flow benefit to the owner
• Multiple: Typically 2-4x SDE for small businesses, varies by industry and growth
• Working Capital: Understand cash flow cycles and capital requirements

Leverage bank financing to maximize returns:

• SBA loans can provide up to 90% of purchase price
• Potential for >100% annual ROI on invested capital
• Balance risk and return when determining optimal leverage

4. Defining Your Acquisition Target: Opportunity Profiles and Target Statements

You absolutely do not need to be in a great industry to produce sustained great results.

Develop a clear acquisition strategy by defining your ideal target company. Consider these opportunity profiles:

1. Eternally Profitable: Stable businesses in mature markets with consistent cash flow
2. Turnaround: Underperforming companies that can benefit from operational improvements
3. High Growth: Rapidly expanding businesses with strong market potential
4. Platform: Companies that align with your specific skills and growth strategy

Create a target statement that includes:

• Industry type (product, distribution, or service)
• Growth opportunity you can execute
• Size range (defined by SDE, not revenue)
• Any geographic or other limitations

Example: "I am looking for a distribution company with strong sales but needing operational excellence, generating $300,000 to $400,000 in SDE, in the Chicago area."

5. The CEO Mindset: Aligning Attitude, Aptitude, and Action

Having a growth mindset is often regarded as the number one predictor of entrepreneurial success.

Develop the right mindset for acquisition entrepreneurship by aligning three key areas:

1. Attitude:

2. Aptitude:

3. Action:

Use tools like SWOT analysis and personality assessments to gain self-awareness. Seek businesses where your skills and interests align with the growth opportunity.

6. Navigating the Search Process: Brokers, Listings, and Deal Flow

Because that's where the money is.

Generate deal flow by building relationships with key players in the business-for-sale market:

1. Business Brokers and M&A Advisors:

2. Online Listings:

3. Direct Outreach:

Remember: The best deals often never make it to public listings. Focus on building relationships and getting "upstream" in the deal flow process.

7. Valuation and Financial Analysis: Buying for the Future, Paying for the Past

Buy for the Future, Pay for the Past

Understand the financials to determine a fair price and identify growth opportunities:

Key Financial Statements:

• Balance Sheet: Assets, liabilities, and owner's equity
• Income Statement: Revenue, expenses, and profitability
• Cash Flow Statement: Sources and uses of cash

Important Metrics:

• Seller's Discretionary Earnings (SDE): True cash flow to owner
• EBITDA: Earnings before interest, taxes, depreciation, and amortization
• Working Capital: Current assets minus current liabilities

Valuation Methods:

• Multiple of SDE/EBITDA: Most common for small businesses
• Discounted Cash Flow (DCF): More complex, used for larger deals
• Asset-Based: Considers tangible and intangible assets

Perform a "stress test" to understand downside risk:

• Calculate minimum SDE needed to cover debt service and management salary
• Determine how much revenue could decline before causing financial distress

Look beyond historical performance to identify future growth potential and areas for improvement under your management.

8. Making an Offer: Letter of Intent and Negotiation Strategies

Time kills all deals.

Craft a compelling offer using a Letter of Intent (LOI) to outline key deal terms:

Essential LOI Components:

1. Type of sale (asset vs. stock)
2. Purchase price and structure
3. Proposed closing date
4. Contingencies (financing, due diligence, etc.)
5. Escrow and expense details
6. Confidentiality and exclusivity terms

Negotiation Strategies:

• Focus on win-win outcomes
• Understand seller's motivations beyond price
• Be prepared to walk away if terms aren't favorable
• Move quickly to maintain momentum

Consider deal structures beyond all-cash offers:

• Seller financing: Aligns interests and reduces upfront capital needs
• Earnouts: Tie portion of purchase price to future performance
• Equity rollovers: Allow seller to retain partial ownership

Remember: The LOI is non-binding but sets the framework for the final purchase agreement. Be thorough but avoid getting bogged down in minor details at this stage.

9. Due Diligence: Verifying and Understanding the Business

Results are gained by exploiting opportunities, not by solving problems.

Conduct thorough due diligence to verify information and uncover potential issues:

Key Areas of Focus:

1. Financial: Verify historical performance and projections
2. Legal: Review contracts, licenses, and potential liabilities
3. Operational: Understand processes, systems, and key personnel
4. Market: Assess competitive landscape and growth potential

Due Diligence Best Practices:

• Create a comprehensive checklist
• Involve professional advisors (accountant, lawyer)
• Look for both risks and opportunities
• Document findings and follow up on red flags

Use the due diligence period to:

• Validate assumptions from initial analysis
• Identify areas for post-acquisition improvement
• Build relationships with key employees and stakeholders
• Refine your post-closing plan

Remember: Due diligence is your best opportunity to learn the business inside and out before taking ownership. Be thorough but maintain focus on material issues.

10. Closing the Deal and Transitioning to CEO

Once you put $2 million in someone's bank account, you start to learn what's really going on.

Execute a smooth transition from buyer to CEO:

Closing Day Preparations:

• Review and approve all closing documents in advance
• Finalize inventory counts and working capital adjustments
• Coordinate with bank, lawyers, and other advisors
• Be prepared for last-minute issues or negotiations

First 90 Days as CEO:

1. Month 1 - Focus on People:

2. Month 2 - Learn the Business:

3. Month 3 - Implement Your Plan:

Keys to successful integration:

• Overcommunicate with employees and stakeholders
• Look for quick wins to build momentum
• Balance maintaining stability with driving positive change
• Stay focused on your long-term vision and growth strategy

Remember: The first 90 days set the tone for your leadership. Be visible, listen actively, and start building the foundation for future success.

Last updated: January 25, 2025

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