Which Entrepreneurship through acquisition (ETA) Model is Best Suited to Your Needs and Goals?

Entrepreneurship through acquisition (ETA), or the path to becoming an entrepreneur by buying and growing an established business, is a strategic way to achieve business ownership with relatively less risk. Though any entrepreneurial endeavor is inherently risky, this path takes the stark reality that nearly 50% of start-ups fail and flips it on its head: by purchasing and leveraging a proven business, owners that choose entrepreneurship through acquisition enjoy a nearly 80% success rate.

However, that trade-off does not come without cost, in this case literally. Buying a business can cost 30 to 100 times more than starting a business, and not everyone has the capital to easily become an entrepreneur through acquisition. Fortunately, there are several ways to raise the necessary capital, and each method comes with its own set of pros and cons.

So… future entrepreneurs through acquisition, we’ve put together this mini guide to the most common ETA models. You can use it to figure out which one is best suited to your needs and goals, and hopefully alleviate at bit of the confusion surrounding funding your acquisition:

  • The Traditional Search Model

The Traditional Search Model is probably what immediately comes to mind when you think about raising capital for any business venture because it’s a well-established menthod. In the world of ETA, it involves raising funds from an investor to cover search phase expenses as well as a salary for the searcher (you), usually for a period of 24 months. The major “pro” of this model is that it allows entrepreneurs to focus full-time on finding a suitable business to acquire during the search phase. The major drawback is that a business owner will be given a smaller share of the company, as equity is usually spread across the entire investor base. This also means the business owner will likely be beholden to the targets and ideas that their investors have in mind. But that isn’t always a bad thing: spreading an equity net also creates a safety net and support system. As long as your goals are aligned with those of your investors, everyone has a stake in the success of you and your business.

  • The Self-Funded Search Model

On the other hand, entrepreneurs that use the Self-Funded Search Model don’t take a salary while searching for an acquisition. Instead, they use their own capital and careful financial planning during the search process. This is the most common search strategy, and it allows a searcher to maintain up to 100% equity in the company they acquire. However, it doesn’t come without risk. Investing ONLY your own capital means the success or failure of the business you acquire rests squarely on your shoulders, and hits only your wallet. This is why many self-funded searchers take on freelance, consulting, or other jobs to support themselves while conducting their searches. This model tends to be better suited to seasoned entrepreneurs: people who have already built networks, might have extra capital to invest, and understand the risks associated with the business they are seeking to acquire. Novice entrepreneurs can attempt this model as well, but it does require careful planning and multitasking.

  • The Sponsored Search Fund Model

The Sponsored Search Fund Model involves partnering with an investing firm that provides all the search and acquisition capital for you and your future business. However, this process also involves the investing firm becoming the controlling shareholder of your future business. The major upside of this model is infrastructure: often the investing firm provides administrative support and other resources that a traditional searcher may have a hard time affording on their own. Having a committed fund of capital from a single source also provides a searcher with legitimacy, as well as the ability to check in with their majority stakeholder often (sponsored searchers usually work on site). The downside of this model is that your partner investment firm will own the majority of your company’s equity and have control over your Board of Directors. This means they will have unilateral authority to make strategic decisions, including firing the searcher as CEO. Though the Traditional and Incubated Search Fund models also carry this risk, they offer the possibility of having a more diverse investor base, which may create a more diverse set of perspectives on your board.

  • The Incubated Search Fund Model

 Similar to the Sponsored Search Model, The Incubated Search Fund Model provides both infrastructure and the potential for daily interaction between searchers and shareholders. The main difference is that this model focuses solely on search funds, with between three and five entrepreneurs searching from an incubator at the same time. The major “pro” of this model is that the singularity of its focus means that all available resources are geared toward optimizing the search process. Intermediary relationships, as well as recruiting, hiring, and onboarding, are all handled at the fund level. This means that a searcher doesn’t have to focus on anything except sourcing proprietary deal flow and eventually closing a transaction. Another major “pro” to this model is that most managers of incubators have successfully pursued some form of ETA in the past, making them potentially invaluable mentors to emerging searchers. However, having three to five searchers operating out of the same fund at the same time has the potential to foster unhealthy competition. Beyond that, an Incubated Search Fund Model has all the same drawbacks as the Sponsored Search Fund Model because it is also a model that provides just a single source of committed capital.

  • The Crowd-Funded Search Model

As the newest form of ETA (emerging in 2016), the Crowd-Funded Search Model is exactly what it sounds like. In this model, the entrepreneur raises capital from crowdfunding sources, usually providing equity in or shares of their business in return. This model can be an effective way to raise capital, and online platforms already exist to assist entrepreneurs interested in crowdfunding. However, terms in this model do change on a deal-to-deal basis, and investors may not have enough equity to feel a strong stake in the success of your business. If you’re looking for a new and exciting way to raise capital, or if your network is full of people who only have a small amount of capital to invest, this model may be worth looking in to.