ENTREPRENEURSHIP
Interest in entrepreneurship through acquisition (ETA) is gathering pace, say Chicago Booth School of Business adjunct associate professors Brian O’Connor and Mark Agnew . Drawing on the potential benefits to both graduate careers and national economies, they demonstrate why the topic is beginning to permeate leading MBA programmes
W hat comes to mind when you think of entrepreneurship? For many, thoughts of an innovative new company being built from the ground up would spring to mind. And these thoughts would be right. However, what about individual entrepreneurs who buy and then manage companies that already exist? Entrepreneurship through acquisition, more colloquially known as ETA, is an emerging trend that sees hungry, hustling entrepreneurs doing just that. The beginnings and ETA’s recent boom ETA is where an individual searches for a suitable business, acquires it and then steps in to lead it, often as CEO. It differs from the better known and more common start-up model because it entails buying a company that already exists, as opposed to starting one from scratch. The concept of ETA was born at Stanford Graduate School of Business (Stanford GSB) in the 1980s, when entrepreneur and professor Irv Grousbeck worked with a student to develop a new investment vehicle; one which allowed the student to buy and then manage a company. He termed this investment vehicle a ‘search fund’. Following some success, the concept began to take off and spread via entrepreneurs, investors, business owners and business schools throughout the US. Three main factors have contributed to the boom of ETA. Across the US, ‘baby boomer’ business owners looking to retire have encountered succession issues and have been looking for alternatives to selling their companies to a strategic acquirer or private equity firm. At the same time, ETA awareness is growing, with more business schools broaching the subject and teaching MBA students and alumni what it has to offer, as well as why it might appeal, in terms of solidifying the legacy of already established businesses. Meanwhile, demand and interest has spiked from investors who view search funds as a lucrative asset
class. Taken together, these three factors have created the perfect storm, allowing entrepreneurship through acquisition to sweep the North American nation. ETA’s journey to Europe It’s fair to say that ETA is becoming well-established in the US. In fact, according to Stanford GSB’s 2022 Search Fund Study , a total of $2.3 billion of equity was invested through ETA search funds between 1986 and 2021, generating a total of approximately $9.8 billion for investors and $2.4 billion for entrepreneurs. Meaningful business and cultural differences between the US and Europe have contributed to a slower adoption and awareness of ETA as a strategy in the latter region. These variances include a differing risk tolerance, entrepreneurial business culture and capital market development. However, this is beginning to change. In today’s globalised world, it’s no surprise that the ETA ecosystem is spreading across borders, into new countries and continents. Indeed, search fund activity outside the US and Canada has increased dramatically in recent years. This has not only been witnessed in Latin America, notably in Mexico and Brazil, but also in Europe, the UK and Spain. According to Iese Business School’s 2022 study of international search funds, 42 have been raised in Spain and 24 in the UK since the advent of ETA. A huge portion of these search funds have been raised since 2018, demonstrating the rapid adoption of ETA as an entrepreneurship strategy in these countries over the last few years alone. The ETA lifecycle Once familiar with the concept of ETA and ready to begin their acquisition journey, an entrepreneur must answer one big question: how will they raise the funds to begin the acquisition process? While this can be done in many ways, it is primarily carried out through self-funding, a search fund or by taking a sponsored approach. A self-funded journey involves an entrepreneur soaking up the upfront costs in relation to finding a business to
Ambition | MARCH/APRIL 2024 | 43
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