If you are a manager thinking about making a change in your career or a newly minted MBA looking to begin a management career, this is an opportunity you should consider: You can buy an existing business, right now, and run it as CEO. We call this entrepreneurship through acquisition, and through our work teaching and researching the subject at Harvard Business School, we have seen many professionals find it an intriguing and rewarding alternative to a more traditional job.
Running your own company offers a radically different career path and career lifestyle than does working at a traditional large corporation. It allows you to lead an organization, make decisions that matter, and have the flexibility to work in a way that suits you best. If you have struggled to find professional independence and fulfillment in bigger companies, entrepreneurship through acquisition could be a path for you.
The financial prospects of buying and running a small business are also appealing. Entrepreneurs through acquisition usually purchase their company using a combination of debt from banks and equity from investors and structure the purchase so that they retain a meaningful economic stake in the business. Such a stake means that you have the opportunity for significant financial reward. You can buy high-quality small businesses for a price that allows you and your investors to earn an excellent return on your investment. Some of this return will be cash flows that you’ll distribute each year to your investors. Eventually, you and your investors might sell the business, and if you’ve been able to grow it, you should be able to sell it for far more than the purchase price, resulting in a meaningful financial gain. So, entrepreneurship through acquisition offers both an exciting career and a significant investment opportunity.
Part of what ignites our passion for small businesses is also the variety and uniqueness of the businesses themselves. Entrepreneurs whom we’ve studied have gone into home health care, exotic travel, musical instrument rental, specialized software, and manufacturing. Some of these businesses provide services you might have known about, like commercial window washing for skyscrapers; others you may never have thought of, like testing fire hoses. These are smaller firms with steady annual revenues of $5.0 million to $15.0 million and annual cash flows of $750,000 to $3.0 million. They aren’t rapidly evolving tech companies or glamorous businesses, and journalists don’t write as much about entrepreneurs through acquisition as they do about founders of big start-ups. But we estimate that there are about 200,000 of these businesses in the United States—with many more around the world—and that every year thousands of them are bought and sold.1
You may be more qualified to run a small business than you think. Experiences such as managing others and taking on responsibility for financial performance give you much of the background you need. We’ll introduce you to a number of entrepreneurs through acquisition—people we’ve known and worked with (and in some cases even invested in) so you can learn from their experiences. You may see that these people are not so different from you. (See, for example, the sidebar “Tony Bautista: Entrepreneur Through Acquisition.”) Almost none of them were CEOs before; rather, they typically have 5 to 15 years of professional experience, mostly at the junior level, and some have middle-management experience. None had bought a business before or had significant personal wealth when they started, and all of them raised money from investors to complete their acquisition. Some of the entrepreneurs pursued opportunities in the United States; others found that this path was the perfect way to put their management skills to work in their home countries around the world. And contrary to popular myths about entrepreneurs, all of them are generally careful people rather than reckless risk takers. Instead, what sets them apart is that they are energetic, tenacious, and smart individuals open to pursuing opportunities in smaller businesses and niche industries rather than focusing only on opportunities with the biggest brands or in the most popular sectors.
Tenacity is important because there can be some significant challenges along the way. As we studied the market for these businesses, we were surprised to find that the earliest stumbling block for purchasers—and one of the biggest—comes in the search for and acquisition of the business. We’ve seen potential buyers quit because their search has dragged on unproductively too long; we’ve seen deals fall through after months of work because the buyer didn’t ask the right questions of the seller at the beginning of the process; and we’ve seen starry-eyed searchers buy businesses that didn’t live up to expectations. We’ve also seen many people who didn’t even start the process, because they didn’t feel qualified or didn’t know how to begin their search or raise the capital to pay for their search or their acquisition.
Tony Bautista, CEO of Fail Safe LLC, a leading fire-hose testing service for local fire departments, acquired the company after a 10-month search. “Looking back,” Tony observed, “the biggest barrier wasn’t capital, wasn’t experience, wasn’t contacts. More than anything, the barrier is internal: It’s making the decision to do it.”
Boston-born Bautista grew up with his younger sister in a household headed by a single mother, herself a first-generation immigrant to the United States. “We were certainly never hungry,” he reflected, “but mom usually worked two jobs, and we also relied on food stamps. More than anything, my mother impressed on my sister and me the value of an education.” Tony was enrolled in a weekend and after-school acceleration program at his local public school, and the program eventually led to a full scholarship to college. While there, he earned money managing a tutoring service for high school students.
After college, Tony worked for a large investment-management company for over three years. “I learned a lot about financial analysis and accounting,” he said, “but I felt I was just shuffling numbers around. When I ran the tutoring service, I could see the impact of my work. This disconnect bothered me, and when my mom passed away prematurely in 2010, I was galvanized to do something about it.” Tony enrolled in business school and worked in venture capital in the summer between his first and second years. “That didn’t do it for me either,” Bautista reflected. “Venture capital still seemed removed from what had satisfied me so much in the tutoring firm—satisfying clients, giving a paycheck to employees, and directly building a business. On top of that, backing start-ups seemed so risky to me.”
During his second year at business school, Tony decided to search for an existing smaller business to buy, although he was only 28 years old. “Besides being a hard worker,” he said, “I think my greatest strength is being able to relate to a wide range of people. Not coming from a wealthy background but going to college and business school taught me this. I could talk to business brokers about numbers and financing a purchase; I could talk to rough-edged owners who ran firms with lots of blue-collar employees; I could talk to investors who might back me in my purchase.”
In 2014, Tony acquired Fail Safe from its retiring CEO/owner. Fail Safe sends crews to local firehouses to perform annual safety testing of fire hoses; Tony is immersed in the tasks of talking to customers, scheduling, managing his crew chiefs, and the other myriad tasks of running a mission-critical service business with workers spread across many states. “Looking back,” he said, “my biggest gap was a lack of experience in the details of operating a business: How exactly do you run a monthly payroll? for example. I learned as I went; it was sometimes painful, but not fatal.”
Bautista added: “For me, the most satisfying experience is having employees do work for which I send them a paycheck: I am supporting someone who is like me, and, of course, when I’m doing this, it also means my company is making money.”
The search process is critical. If it works, you’ll be managing the business for a significant number of years—perhaps much of your remaining working life. The financial success of the business will determine your lifestyle, your location, and even the schools you can send your kids to during that time and after. There is also no easy out if you make a mistake and buy the wrong company. If your company fails, you’ll likely lose it and all of your savings, as well as any investments you’ve accepted from friends and family. Choosing well is very important.
In this book, we give you the advice and tools you need to successfully find and purchase the right small business for you to run. We’ll show you how to take several important steps:
Does running a small business seem risky? Perhaps you’re imagining the things that could go wrong once you acquire a company: What if it stops generating as much revenue when you are at its helm? What if your most valued customers switch to a competitor? What if the market for the hot new technology you’ve invested in crashes? What if you can’t pay the employees who depend on you? What if, what if, what if? You can probably assemble a nearly endless list of challenges. It’s true; a lot of bad things could happen. Be mindful that they could happen to a big firm too but, as a small firm, your enterprise is certainly less sturdy than a large corporation.
But during your purchase process, there are ways to mitigate these risks. In this book, we show you how to find a business that is enduringly profitable, one that is more likely to continue to have a stable income over time. It’s not always easy to know what makes a small business enduringly profitable, but we have identified a few indicators to use as you evaluate potential businesses: for example, the business should be an established one that is growing slowly and has recurring customers. We recommend against buying a tech company or any business in a volatile industry, and we urge you to stay away from companies that “just” need a turnaround. We think “dull” businesses are terrific business opportunities—and a great way to mitigate the risk of small-business ownership.
Also, recognize that the alternatives to entrepreneurship through acquisition may actually be more risky than you think. If you’re considering entrepreneurship by start-up, for example, you must build a company from scratch, without knowing whether the product or service can support a profitable business. When you start a company—before you make any money—you face a long list of required tasks. You must develop a product or service, identify your potential customers, and figure out how to deliver the offering to the customers. You must also hire all your workers, market to customers, build a management system, and then hope your offering is something customers want to buy at a price high enough for you to make a profit. Buying an existing, enduringly profitable business is less risky—not 100% safe, but much safer because the fundamental questions about the viability of the basic business model have already been answered. When you buy a business, the product or service is already established, and if you buy the kind of company we recommend, it is likely to produce steady cash flows while you focus on improvements and growth.
And what about working at a large firm? All of the entrepreneurs we studied turned down or quit a good job at a large organization to pursue this opportunity. When we asked them about the risks involved, they reminded us that working in a large company is also risky. Coca-Cola, Intel, or Tata are not going to vanish the way that a small enterprise might, but in a large company, your division might shut down, your job might be eliminated as part of a reduction in force, or your career could be held back because of the politicking common to large organizations. Also, as you become more senior in a bigger business, your role often shifts, perhaps to one you enjoy less or in which you are less likely to excel. Often, these risks are not apparent until it’s too late to do anything about them—and as a single employee, you have very little control over the situation. Small-firm entrepreneur Charles Muszynski, co-owner and co-CEO of outsourced waste services firm Talismark, likes to say, “I like being the only person who can fire me.”
To be sure, the entrepreneurship-through-acquisition path is not an easy one. It requires much hard work, the ability to bounce back from disappointments, common sense, and business acumen. Though you face less uncertainty than you would in founding your own startup, there is still risk—especially in the search itself. And you’ll have to do without certain comforts, such as a familiar peer group at work. But many of the entrepreneurs we studied found that what they’ve gotten out of the experience far outweighs the costs.
Beyond the salary that you pay yourself—which may admittedly be more modest than what you might earn in a senior position at a large organization—your business is an investment in which you have a meaningful economic stake. The purchase price of smaller businesses tends to be relatively low compared with their profits, making them appealing as investments.
Consider this representative example. One of our former students recently bought a business for $10.25 million. The business generates a yearly pretax operating profit of $2.5 million. That means he and his investors are earning almost a 25% annual return on this $10.25 million purchase. If that same $10.25 million were invested in a traditional investment vehicle—like a well-diversified mutual fund—it would earn far less, perhaps less than 10%, or $1.0 million.
Of course, this entrepreneur didn’t see this entire return. The total acquisition cost included $250,000 of closing costs. He funded the acquisition by borrowing $7.5 million and raising $3.0 million of equity from a group of investors. So his deal to purchase the company looked like this:
The interest on the $7.5 million of debt was 6.5%, or about $490,000 per year, leaving about $2.0 million per year available to the owners (the buyer and the investors):
Per his deal with his investors, our entrepreneur received 20% of any profit from running (or eventually selling) the company, in addition to an annual starting salary of $150,000 to run the business. So, in the first year after acquisition, his financials looked like this:
Of course, only the $150,000 was in cash; the rest of the compensation is deferred and contingent on the outcome of the investment. And all of these are before taxes. But this is still an impressive increase in our entrepreneur’s anticipated wealth in a short time.
Furthermore, the entrepreneur bought the business because he plans to grow it, increasing not only its annual profits but also its total value. For example, if he runs it for 10 years and is able to grow it at 5% a year, his annual wealth creation would be about $850,000. And while the majority of his return on his investment comes from the ongoing profits from the business, if he were to sell the company and if market conditions were the same as when he bought it, his share of the gain on the sale would be roughly $1.3 million. In total, adding up all of his compensation over the 10 years, plus his share of the gain on exit, he would pocket over $8.0 million before taxes.
At the heart of these remarkable rewards is the fact that these businesses are often available at prices that are low relative to the companies’ annual profits. Opportunities like this exist because most owners of successful smaller firms eventually need to sell them—to retire or because of health issues, divorce, acrimony among business partners, or other factors. Their children may have completely different professions—their daughter a doctor, their son a poet—and no one in the family is interested in taking over a manufacturing business. Owners of bigger businesses have more options, but owners of smaller companies typically need to find someone outside their firm who can both buy their company and take over its management.
But few people have both the ability to raise the required capital and the interest in managing a small company. And the difficulty of finding enduringly profitable acquisition targets means that potential buyers who have the ability to finance and then manage a small company will also need to find the right company first. The search requires significant time, effort, and funding. So, while there is a steady supply of small-business owners who are compelled to sell, there are few buyers. This disparity keeps the prices of smaller companies attractive to buyers.
Beyond the potential financial rewards, buying a business can also give you professional independence and personal fulfillment. In most larger businesses, it is difficult for people to obtain meaningful leadership responsibility early in their careers. But when you’re the CEO of a small business, you set the strategy of the firm and make every significant decision about how the firm is run. For some people, like Greg Ambrosia, one of the most attractive elements of buying a small company is that it provides the opportunity to have an immediate impact on his company and its employees (see the sidebar “Greg Ambrosia: Entrepreneur Through Acquisition”).
On winter mornings, it’s chilly inside the cavernous staging room at Citywide Building Services. Citywide is the leading high-rise window cleaner in the Dallas/Fort Worth Metroplex. At 6:15 one morning, 48 washers watch CEO Greg Ambrosia as he calls out assignments, and crews begin peeling off in company trucks to make their way across the just-awakening city.
Citywide was founded 30 years earlier by two energetic, entrepreneurial sisters who built the company’s preeminent reputation for safety and quality service. The company serves most of the region’s tall office, hospital, and university buildings with this essential, quietly recurring service. In 2014, the two founders decided to retire, and Greg acquired the company after about 11 months of searching.
“Being a CEO involves making decisions all the time and successfully working through others,” Greg said, “and as a result, this work is completely engaging for me.”
Greg didn’t come from a business background at all. He grew up in Knoxville, Tennessee, where his father is an orthopedic surgeon, his mother a homemaker, his brother also a surgeon, and his sister a nurse. “I didn’t grow up at a dinner table hearing the language of business,” he observed. Graduating from high school, he decided not to follow a path into medicine—or into business—but instead was accepted to the U.S. Military Academy at West Point. “In studying high school American history,” he said, “I was struck by how many leaders went to West Point. I came to admire the school’s tradition and mission of training leaders for service.” After graduation, Greg served in Afghanistan, where, among other assignments, he led a company of 120 soldiers in combat and was awarded a Silver Star.
In 2011 he left the army and attended business school to facilitate his transition to civilian life. “I had never held a serious private-sector job. As a result, I didn’t know much about accounting, finance, sales management, or other critical business functions. Getting some training in these subjects was necessary for me.”
Between his first and second years of business school, Greg interned at a large corporation. “I liked the people and thought they were really smart. But the lack of personal responsibility and authority was just not satisfying for me. That’s when I started to consider other paths. I was really looking for an opportunity to show greater leadership and to be entrusted with meaningful responsibility.”
Everyone who begins this journey of entrepreneurship through acquisition starts out with different strengths and weaknesses. “My weaknesses were apparent and immediate,” he said. “I had never bought or financed anything bigger than a car. But I addressed that by teaming up with some investors who could advise me. In contrast, I did have useful experience in leadership, which has translated well to my new role.” After a management transition period with the sellers, Greg has been making decisions that he believes will move Citywide to the next level: recruiting new high-rise washers, upgrading the company’s training and safety program, revamping compensation to better align the workers and the company, calling on prospective customers, upgrading Citywide’s IT system, and more.
“If there are two things I love most about this job,” Greg told us, “it’s the being able to affect the outcome of my business and my career, and the ability to help people in my company become more successful at what they do.”
As you decide what you want to do with your career, we hope that you come to see entrepreneurship through acquisition as we do—as an attractive third path, an exciting alternative to big corporations and risky start-ups.
One caveat: Most of the examples of entrepreneurs whom you’ll meet in this book are men, and that’s because most of the people who have chosen this career path have been men. Nevertheless, we think owning a small business is a great career for women, and we know women who have had great success following that path. All of the financial and lifestyle advantages of owning a small business are available for both men and women, and some of those benefits might be especially valuable to women. No customer, for example, ever imagines paying less for a product or service because the business is owned by a woman. Plus, as much as men value the flexibility of being their own boss, we think women might value it even more, especially if they have primary childcare responsibilities. Robin Kovitz, president at Baskits, Inc., for example, left a successful career in private equity to search for a small business to buy, because she believed it would enable her to spend more time with her young family.
We often wonder why so few women decide to become entrepreneurs through acquisition early in their careers. One explanation, perhaps, is that more-traditional career paths are more attractive for women as those organizations try to correct a historical imbalance. Alternatively, women may more highly value aspects of a more traditional career—such as affiliation—that come with employment by a well-known, prestigious company. Still, some women do search for a small business to acquire early in their careers. Jenn Braus, for example, finished a business school degree, spent much of the next year with her husband volunteering at an orphanage in Central America, and then returned to the United States, where she began searching for a small business to acquire and then run. She acquired Systems Design West, a successful software and services company serving the emergency medical services industry, and is now its CEO.
We also find that some women may view the entrepreneur-through-acquisition path as more appealing later in their careers. We see these women begin to search after having successfully worked in larger organizations while raising families. They decide to turn to entrepreneurship through acquisition because it fits with their evolving interests and lifestyles.
We think the decision to pursue entrepreneurship through acquisition depends on your skills and goals, not your age or gender. In the next chapter, we’ll explore more of what makes a good entrepreneur through acquisition to help you decide whether this is the right opportunity for you.
1. Our best data on the number of smaller firms in this size range suggest that there are 130,000 to 240,000 such companies, with S+P Capital IQ estimating the lower end and the U.S. Census computing the higher end. If businesses with average revenues of less than $5.0 million are included, the number rises to over 1.4 million.
