Entrepreneurship through acquisition (EtA) is gaining a lot of attention these days. Essentially, it is the idea of becoming an owner-CEO by buying a company instead of starting one from scratch.
So why the fuss? Haven’t buying and selling companies been happening for centuries? Yes, but there’s a catch.
With the Succession Tsunami (a 2022 report by the Canadian Federation of Independent Business) hitting Canada and the United States, EtA is gaining awareness as one solution to our succession problem.
In Canada alone, more than $2 trillion worth of companies expect to transition ownership in the next 10 years. Shockingly, only nine per cent of these owners know how they will exit and who will purchase their businesses. This means that $1.8 trillion worth of Canadian companies are up for grabs.
Combining CFIB’s percentages with stats from Innovation, Science and Economic Development Canada shows about 93,000 Canadian firms with 20 to 99 employees (the lower mid market that typically falls within the EtA target) that could be potential targets for EtA.
The demand for qualified buyers is evident. While large firms may attract attention from corporate acquisitions and private equity, the lower mid-market businesses valued between $5 million and $20 million present fertile ground for EtA strategies. The supply of buyers may well be provided through EtA.
Such acquisitions may sound like a gamble, but it’s a calculated one. The term, coined at Harvard in 1983, describes a model where recent MBA grads raise capital (a search fund) and mentors to support their search for a profitable firm to acquire. Once the acquisition negotiations are complete, these grads raise the additional capital needed from an average of 18 investors to purchase the firm. While audacious, the model has consistently generated an average annual return of just over 30 per cent for investors — albeit with associated risks, despite taking out the distorting high-flyers.
Harvard and Stanford nurtured the EtA model in relative obscurity for many years. Chicago’s two major business schools got involved in the early 2010s, and five to six years ago the model’s adoption hit another gear. Many prominent American schools in other cities began to launch courses to teach and support students in this venture, recognizing the Baby Boomers’ generational wealth transfer includes entire businesses. Concordia and now Haskayne in Calgary are the first Canadian business schools to engage.
Although growing exponentially, the model is still small and has developed variations.
The movement’s founders and investors acknowledge that these new “owners” typically know little about the industry they buy into. Therefore, those undergoing rigorous EtA training are cautioned to spend the first couple of years simply learning the business. Jan Simon, the director of IESE’s Search Fund Center in Barcelona, warns students to avoid using MBA jargon in their acquired firms.
In other words, although these new CEOs have received specialized training in managing and building businesses, nobody at their newly acquired firm will be impressed by their technical jargon. Quite frankly, employees and clients are likely more concerned at the start that the new owner doesn’t know how to fix a furnace that won’t light if the business they bought is an HVAC firm.
The EtA movement faces the challenge of raising awareness among investors, mentors, potential sellers and buyers about the nuanced opportunities and responsibilities it presents. While not making headlines like high-profile startups, targeted businesses play a vital role in the economy by meeting essential market needs, creating jobs and generating steady profits.
This path offers new owners a chance to contribute meaningfully to their communities, ensure the founders’ legacy and grow a thriving venture. Embracing EtA is about more than investment — it’s about stewardship, innovation and, most importantly, establishing and mentoring a new generation of CEOs to keep our economies and environment strong.
Phil Davidson is an assistant professor and director of the Haskayne School of Business’s executive MBA program. He can be reached at [email protected]