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acquisition entrepreneur

30 Days to ETA | Day #19 – The ETA Business Valuation

June 19, 2021 By Sam Palazzolo, Managing Director

If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #18 post I discussed how as Acquisition Entrepreneurs one of the paths forward for you could be The ETA Conglomerate. If you love what you do, and in doing so want more love, then it’s natural to want to explore owning more than one business as a part of your Entrepreneurship Through Acquisition journey (You can read the previous post by CLICKING HERE). Part of the ETA difficulty as an entrepreneur is identifying the value you should be willing to pay for a business. So, in today’s 30 Days to ETA post, we’re going to explore how you can create and justify the price you should pay based off of objective versus subjective criteria — The ETA Business Valuation… Enjoy!

30 Days to ETA The ETA Business Valuation

The ETA Business Valuation

At Tip of the Spear Ventures’ Mergers & Acquisitions practice, we’ve analyzed over one-thousand businesses in our screening process. The filters that we employ allow us to accurately, and objectively based on quantitative data, assess a business for potential acquisition. Why do we look at so many?

The reason why we invest time/money/effort into exploring so many different businesses for mergers or acquisitions is because we have a number of filters in place in our search for a business. These filters are by design established to move potential businesses out of the process, as opposed to passing them on or through the process to the next step. Why do we want to filter out organizations sooner, rather than later?

Preparing for The ETA Business Valuation

Buying a business as an Entrepreneur Through Acquisition will find you with a ton of businesses you could explore purchasing. Today, as I write this, there are over 11,000 businesses listed for sale on BizBuySell.com in the geographic-freindly location that we focus on conducting M&A work. With this large quantity of businesses available to explore, you will have to have the mental fortitude, the financial fortitude, and the emotional fortitude to get through this ETA process. It’s imperative before you begin the process that you stop. Let’s do a personal and business assessment to determine the Minimum Viable Acquisition (MVA) Criteria you need before exploring as an Acquisition Entrepreneur.

Minimum Viable Acquisition (MVA) Criteria

Minimum Viable Acquisition (MVA) Criteria focus on what you need a business to consist of at the minimum levels in order to move forward in your due diligence investigation. It’s in this MVA analysis phase where you are identifying if you should move forward and further investigate the organization or discharge them from the process. Whatever your answer is, have you quantify this in an objective manner.

ETA candidates typically ask me why I’m so firm on the objective nature of MVA versus a subjective one. After all, I’ve had several ETA candidates tell me that the concept of “love” as in “I love what I do” is typically a subjective one — not an objective one. While I encourage you to love the business that you’re exploring, I also know that love can cause you to be blind. And it’s exactly in these blindspots that if you allow for subjective decision making to take over, you’ll quickly fall out of love and worse yet end up in the poor house! None of us — and I mean none of us — are going into this Acquisition Entrepreneur initiative with the end goal of arriving at the poor house (Perhaps this is why the focus of nearly every Day #1 through Day #18 here in this ’30 Days to ETA’ series has been focused on end results of selling the business you ultimately acquire for a profit!)

So I ask you to stop, pause, and look at your leadership capabilities. Then, ask yourself the following Minimum Viable Acquisition (MVA) Criteria planning questions:

  1. What do you need cash flow to be?
  2. Will you have enough to finance the Acquisition?
  3. Are your risks managed?
  4. How will you lead your new business?

The ETA Business Valuation meets MVA

You see, the goal for most of us in the ETA space is to acquire a business and grow it to where it’s just a part of our overall net worth, not 80% of it. Many times at this ETA phase, I see entrepreneurs desiring 500k, 1, 5, 10, 15, 20, or even 40 million dollars a year in revenue. Or, like many of my clients, they are bringing in hundreds of thousands of dollars a year in their personal income from the organization that they currently work for — income that needs to be replaced/offset/improved on after the acquisition of a new business.

I was interviewing a candidate for our Entrepreneur in Residence program here at Tip of the Spear Ventures. The candidate was extremely bright, very well educated, and had what I thought was a great aptitude to be one of our owner-operators of a business that we would acquire. What they weren’t great at was seeing that being an owner-operator wasn’t like working for a Fortune 500 company or a consulting firm with built in compensation structure. As the owner of a business, there are times when you acquire one and need to sacrifice your monthly compensation so that you can make payroll for the team you inherit. The candidate couldn’t wrap their head around this, and ultimately went to work for a consulting firm instead.

How to Estimate the Value of a Business

So this is where business value comes back into play. At this point in your ETA process, you will need to have a rough estimate of the value of the company. Now, I’ve created a whole post about business valuations and how businesses are valued. My experience as a Managing Director at Tip of the Spear Ventures and as a value growth expert has led me to draw up detailed assessments of current business values based on EBITDA and industry-specific value multipliers.

EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. So if you have a business that is worth five times EBITDA, or 200% of collections, or three times recurring revenue, all of those things are good guidelines to follow to get you close to what you think your business is worth. At this point, I’m not talking about the nitty-gritty of value calculations. I’m just talking about getting together a very rough business value estimate, or assessment.

Determine the Minimum Viable Acquisition (MVA) Criteria You Need

After you evaluate and quantify your personal and business assets, you will need to determine whether or not you have enough money on which to live after you buy the company you are investigating.

If you tell me that the current value of the business you’re exploring is two million dollars, I’ll ask, “How much do you need to reach your goals?” If you tell me you need two hundred thousand dollars a year to reach your goals, I’ll ask “What other assets do you have and what in the business could be potential levers we could improve to achieve that comp level?” If the business doesn’t currently generate that compensation level for the current owner, who is smart and has been running the business for the last 30 years, what makes you think you can jump in the President role and achieve that so as to reach your desired compensation. In other words, you may be in trouble.

Conduct ETA Business Valuation GAP Analysis

After running personal and business assessments, you may find that there is an ETA Business Valuation GAP. In other words, there is a difference between the business valuation of the company you’re looking at and the minimum viable acquisition criteria you actually need to meet your life goals.

That ETA Business Valuation GAP can occur at many different business and personal levels, so it’s time to find it. Now is the time to look for the gaps – before you buy the business on the open market.

SUMMARY

In this ’30 Days to ETA’ post we’ve explored the concept of the ETA Business Valuation and the role it plays in allowing you to search for businesses that are appropriate for your goals. Too small of a business valuation could lead to missing your Acquisition Entrepreneur goals. We’ve discussed the objective versus subjective nature of ETA, one that can keep you from falling haplessly in love — and help you avoid the poor house! I also introduced what I call the Minimum Viable Acquisition (MVA) criteria. This MVA criteria allows you to focus on best-case businesses that are closer to where you ultimately want to get with your goals.

Sam Palazzolo

Filed Under: Blog Tagged With: acquisition entrepreneur, acquisitions, Buy a business, entrepreneur, entrepreneurship through acquisition, ETA Business Valuation, mergers, Mergers & Acquisitions, minimum viable acquisition, MVA, sam palazzolo, tip of the spear ventures

30 Days to ETA | Day #17 – The ETA Exit Plan

June 17, 2021 By Sam Palazzolo, Managing Director

If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #16 post I discussed how to maximize ETA Deal Flow. You need to analyze a lot of businesses in order to get one to purchase in your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). But even though you’ve found the perfect business and were fortunate to purchase it, I’m going to encourage you to focus on the end. In today’s 30 Days to ETA post, we’re going to explore how that end-game focus — The ETA Exit Plan — can provide you with all kinds of benefits, especially financial benefits if you do things right… Enjoy!

30 Days to ETA The ETA Exit Plan

The ETA Exit Plan

Entrepreneurs Through Acquisition (ETA) have to have a plan in place for how to get where we want to go — Something I refer to as the ETA Exit Plan. The future sale of your company is your ETA Exit Plan destination. I wish I could tell you that the road from where you are now (Acquisition Entrepreneur) to successfully selling your business in the future with generational wealth (The ETA Exit Plan) is a linear-shortest-distance-between-two-points line. Unfortunately, it rarely is a straight line! Instead, you can anticipate experiencing some type of setback along the way.

I typically refer to these setbacks as roadblocks. Your objective when you come across them, is to get on the other side (Either up/over/under or around) as quickly as possible. Here’s where the ETA Exit Plan gets good — You can anticipate coming up to another roadblock after you clear one, and another after that one, and so on. Not that that is “good” news, but it might come as news to you in general. Most of the Acquisition Entrepreneurs I work with at Tip of the Spear Ventures believe that they will not have to encounter any roadblocks on their ETA journey — WRONG! No matter how much planning you do. No matter how well you execute those plans. There will always be a roadblock along the way to the ETA Exit Plan accomplishment.

Making the ETA Exit Plan

By this point in our series, you should already have a business plan in place and be following that plan to find your future business through Mergers & Acquisitions. You’ve been preparing for this business acquisition since you discovered ETA, so it only makes sense to also focus on the sale of that business not only from day one of ownership, but before you even purchase the business! If you don’t have a business plan, drop everything and do that first. You’re not ready to acquire or consider how you will sell the business. You need to go back to the beginning of your business and identify how you want the end to occur!

How to Prepare for The ETA Exit Plan

No matter how good your original business plan is, you’ll never be able to walk away from this amazing company you’ve developed if you’re not mentally prepared. If you haven’t come to terms with letting someone else buy your business, you might even pass up millions of dollars. At Tip of the Spear Ventures Mergers & Acquisitions practice, we often speak with owners of businesses that tell us the all too often sad story about how they should have sold two-three years ago at triple the price they’re talking with us about selling their business. But there are things you can do now to prepare for the ETA Exit Plan.

What to Include in The ETA Exit Plan

  1. Decide what you’ll do after you sell – Make personal plans to travel, golf, take care of grandkids, spend time on a hobby, or begin another business before you leave this one.
  2. Gather your ETA Professional Team – Let your professional consultants, employees, family members, and friends know what your personal exit goals are so that they can hold you accountable for reaching them.
  3. Establish a Timeline – Decide what age you want to be when you “retire” or sell your company so that you can make appropriate personal and financial plans.
  4. Make a step-by-step Financial Agenda – If you know when you want to sell, you’ll know how much money you need to set back monthly in personal retirement accounts or savings accounts. If you lay out a detailed financial agenda, you’ll have the money you need to enjoy your life of leisure or your next big venture. Any profit from the sale will just be the icing on your financial cake.
  5. Hold your ETA Team Accountable – Just as your ETA Team is holding you accountable, hold them accountable as well. Don’t let anything slip through the cracks that could leave you or your company vulnerable at its time.

Which ETA Business Owner Are You?

You may be a person who constantly develops plans, but you can’t start or implement them. Maybe you’re the person who starts 20 things but can’t finish one thing. Or you might be the person who has his hand in 1001 different things. Whether acting, finishing, or prioritizing is your weakness, I have the same word of caution for you. It’s WAY too risky to jump right into ETA or into the sale of your future without having a plan. Many times, it’s impossible.

Creating the ETA Exit Plan can provide you with timelines, agendas, financial estimates, and accountability. Walking through these contingency scenarios for the time after we leave our business can help us prepare for our next step in life. Additionally, if we’re preparing to leave, we’re stepping back from day-to-day operations. That leads to a business’s self-sustainability and scalability which we previously discussed.

SUMMARY

The best-designed plans don’t do us any good unless we act. So, get the ETA Exit Plan down now as you conduct your search as an Acquisition Entrepreneur and you’ll find it easier when you go to exit the business.

Sam Palazzolo

Filed Under: Blog Tagged With: acquisition entrepreneur, acquisitions, Buy a business, entrepreneur, entrepreneurship through acquisition, ETA, mergers, Mergers & Acquisitions, sam palazzolo, The ETA Exit Plan, tip of the spear ventures

30 Days to ETA | Day #13 – ETA Risk Mitigation

June 13, 2021 By Sam Palazzolo, Managing Director

If you’ve been reading along in this 30 Days to ETA series, you know that in the Day #12 post I discussed how your ETA Metrics/KPIs allow you to establish a scoreboard for your journey to Entrepreneurship Through Acquisition (You can read the previous post by CLICKING HERE). In today’s 30 Days to ETA post, a wise person once told me, “Somebody else’s experience is a far better teacher than your own.” I wish I had listened to that advice. If I had understood the vital role of a business risk assessment in the purchase of a business, I might have avoided making the single biggest mistake of my business career… Enjoy!

An Expensive Education

Many years ago, I had the opportunity to purchase a business. It appeared, by all standards, to be a very good opportunity for me. So like any prudent business person, I began gathering intelligence on the business and conducting due diligence. I looked at everything in the company — From interviewing employees and customers to looking at the financial statements. I went through this business with a fine-tooth comb attempting to leave no stone unturned. I also thought I was being prudent by seeking counsel from my ETA Professional Team of attorneys, CPAs, and other professional advisers.

It was during this due diligence phase that I can remember asking myself, “Do I really need to buy this business? Should I really add this much stress to my life?” Like an angel sitting on my shoulder, my conscience warned me over and over against purchasing the company. I began to focus on the pros of buying the business. To my detriment, I ignored the red flags I saw in the list of cons.

Long story short, I came really close to purchasing the company. What seemed like minor discrepancies in the business assessment at the beginning, ended up becoming MAJOR problems at the end. These problems caused lots of harm, lots of grief, and lots of brain damage. Ultimately, I was glad that I had listened to my gut and the risks that appeared in the assessment I conducted. If I hadn’t, I would have bought the company. The excitement for the potential of making more money, though, almost got the better of me, and it nearly cost me years of my business life.

30 Days to ETA - ETA Risk Mitigation

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ETA Risk Mitigation

In 30 Days to ETA, we Entrepreneurs Through Acquisition face risks in many different shapes and sizes. Depending on the industry, harm could befall us in unusual ways. For instance, you could face environmental or weather-related risks. National or global-economic crashes could take the legs out from under the business you’re considering. Changes in employment, political parties, market competition, or the like could also pose risks to businesses.

No matter what business you’re in, each will face risks. And dealing with the risks is what a successful Acquisition Entrepreneur does. More often than not, you’ll deal with the legal implications or ramifications of the risks. Some must comply with OSHA, HIPAA, or the Patriot Act. What about the Equal Opportunity Act or the Labor Standard Act? Regardless, all business owners have to deal with national or state laws that create risks in their companies, so preparation is the best plan for Entrepreneurship Through Acquisition.

Before we can manage risk, you must identify the risks and comply with the laws that govern them. The biggest mistake most make is not looking at all of the potential risks involved with buying a company, and the risks you ignore have to do with legal risks. Most of see the upside, but rarely see the full potential of the devastation of the downside. You must be aware of all of the various types of potential risks, and you must follow the laws that govern the risks. As an attorney friend of mine says over and over, “Ignorance is not an excuse not to obey the law.” We definitely have our hands full.

The great ETA Alfred E. Neuman said it best…

‘What, Me Worry?’

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

Risks Monitoring

So what are we Entrepreneurs Through Acquisition to do with the ETA Risk Mitigation we discover? Whether you’re preparing for a business merger or acquisition, you should sit down with every business you’re considering placing under Letter of Intent (LOI) and do a new risk assessment of the company. The reason I recommend looking early and often is because risks change. The state the business operates in may have issued new employment laws, or a competitor may have opened their doors since the last risk assessment. What if interest rates have changed or new tax laws been issued? With so many different types of risks, where do you start?

Business Risk Assessment – 6 Steps

  1. Consult outside counsel – Start with a good insurance agent who works to protect you from risk on a daily basis. Then, talk to your attorney, CPA, and a CERTIFIED FINANCIAL PLANNER™ to identify and forecast potential risks.
  2. Seek internal advice – Rally your family and your team, and perform a S.W.O.T. analysis. Identify Strengths, look for Weaknesses, find Opportunities, and guard against Threats.
  3. Weigh probability – Rank your identified risks in order of how likely they are to occur. Start with the most likely. Finish with the least likely.
  4. Predict harm – If your greatest risk is not harmful to the company, don’t devote countless time and energy to it. Instead, manage the risks most likely to cause harm.
  5. Address the risk – Don’t ignore any of the risks. Use your rankings and predictions to decide which ones need immediate attention, but don’t turn a blind eye to any risks.
  6. Monitor for changes – Shoot for yearly risk reviews to keep up with legal, economic, or political changes.

How ETA Risk Mitigation Effects M&A?

So how does ETA Risk Mitigation assessment and resulting management apply to our Entrepreneurship Through Acquisition journey? It’s not rocket science. Any potential buyer will be looking closely at the business you’re investing’s risk management process to see if they understand the risks in their business and to see if they’re prepared to handle the effects of those risks. Acquisition Entrepreneurs will want to look at the company’s risk management track record to see if they’ve prepared for and battled the risks successfully.

Put yourself in the seller’s perspective. The last thing their buyers want to do is come and purchase a business with holes in their risk management shield. If a buyer realizes they haven’t paid their workers’ compensation insurance or employee payroll taxes, they might (will?) walk away from the company. Entrepreneurs Through Acquisition haven’t spent all of their time and effort looking to acquire a business in hopes of selling it for millions only to see holes in its foundation before they actually purchase it. If you ignore parts of the business’s risk assessment, you will most likely lose significant interest in the future of the business (you will have exposed vulnerability).

So friends, now is the time to conduct ETA Risk Mitigation via an assessment of the business. Prepare yourself. Compare the company. Buy it and make millions!

Sam Palazzolo

Filed Under: Blog Tagged With: acquisition entrepreneur, acquisitions, Buy a business, entrepreneur, entrepreneurship through acquisition, ETA Risk Mitigation, mergers, Mergers & Acquisitions, sam palazzolo, tip of the spear ventures

30 Days to ETA | Day #10 – ETA Culture

June 10, 2021 By Sam Palazzolo, Managing Director

In our last post in this 30 Days to ETA series, we discussed your ETA Mission, Vision, & Values (You can read the previous post by CLICKING HERE). Having clarity in the Entrepreneurship Through Acquisition strategy is paramount, and nothing signals that more than your identification of where you want to go with your future business. In this post, we’re going to explore the backbone of how you will get to that future destination via ETA Culture. ETA Culture is your business’ values and culture that will shape owner-employee relations. The business that has outstanding values and inviting culture can help bring top dollar at the time you want to eventually sell… Enjoy!

30 Days to ETA - ETA Culture

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The ETA Culture of Helping

I once met with a small business owner as part of our Mergers & Acquisitions initiative at Tip of the Spear Ventures. From all outward appearances and secured financial information received, this was a very successful organization and I was looking forward to meeting with the owner. They employed several technology advancements (rare for a small business), and these served as their differentiators in the market. On top of the entity/individual credentials, the organization was referred to me by a colleague with whom I’d been looking to do a project together with.

It appeared to be great all the way around! Great company doing great work referred to me by a great person. And then I walked into their office. Actually, let me backup and share that I couldn’t get into their office at 7:45am. I come from one of those “To be early is on time, to be on time is to be late” cultures. Our meeting was at 8:00am and I typically show up fifteen minutes early. However, when I got to their office the doors were locked. Located in an urban-sprawl setting, I initially thought this was a security reason (Yes, it was a sketchy part of town!) But surely the owner knew I was arriving and would either be there himself or have alerted his staff. Surely not!

On top of the owner not being ready for my arrival, my colleague was running late. I called him and found out that there was an employee in the building and that he’d have them come unlock the door so as to let me in. They arrived at the door, unlocked it, and looked totally inconvenienced by the whole process/procedure as I stood there without them so much as addressing me (No “Good morning” – No nothing!) I said thank you and asked where we’d be meeting. Their overall lack of hospitality was unbelievable. On top of this one individual who should never be public-facing I found the office in total disarray – Trash cans overflowing, disorganization everywhere you looked, and dirty. The final straw was an etched pillow on a chair in the entryway that said on it, “I’m not always a Bitch… Just kidding, go f—- yourself!”

I left the office. Meeting over. ETA exploration done. The ETA Culture of helping was not present, and neither would I be! Everyone has been to a store/place of business and been shrugged off by an uncaring employee. We’ve all seen the dark side of business customer service and it stems from ETA Culture.

You can feel the difference between exciting companies and those with discontent, unmotivated cultures in ETA due diligence. Know that the companies with happy, motivated cultures have significant value, both today and in the future.

Sam Palazzolo, Managing Director @ Tip of the Spear Ventures

ETA Culture and Leadership

I’ve worked with hundreds of business owners over the years, and most of those owners want to talk about money or the problems they’re having with employees. They’ll talk about how to gain more customers and more market share. Yet, I can count on one hand the conversations brought up by business owners about values and culture. Sure, they want to talk about owner-employee relations, and they love to complain about poor employee work ethic or disrespectful employees, rather than asking me how to add value to their team or improve employee morale.

Owners focus on their own grievances rather than how to rectify employee grievances. Oftentimes, those business owners feel they get a bad rap with employees who mistake their drive for greed. They think that all the proprietors care about is money or the next big sale, and the team members hold an unfounded grudge against the owners. Rather than working hard to change employee misconceptions and rebuild owner-employee relations, owners tend to play the victim.

Additionally, those business owners complain about feeling used. A “friend” will call them up and want “free advice.” He’ll pick their brain and secure their professional knowledge and then never talk to them again (or will outreach when the wheels have fallen off the vehicle and they’re in real trouble). That “friend” will ask for discounts just because they went to the same school, and while none of us likes to feel used or abused, Acquisition Entrepreneurs need to know that they shouldn’t feel taken advantage of, and neither should their team members. I’m convinced after working with over 1,000+ leaders in organizations all across the USA and internationally that bad employee problems stem from culture problems, and those stem from leader problems.

Cultivate the E Culture of Kindness

It goes without saying, your people in the business you secure whether it’s from acquisitions or mergers are people — Not objects. We shouldn’t follow the Instagram-narrative that we’re a self-serving culture. Instead, you as an Entrepreneur Through Acquisition should look to cultivate a culture of kindness in our company. What do I mean by kindness? Words like respect, trust, and fairness should lay the groundwork for owner-employee relations. Employees who feel appreciated, valued, well-compensated, and respected will most likely provide respectful and courteous service to your customers. Therefore, I believe that everything in our business blooms out of our values and those values reflect your culture.

3 Rules for ETA Culture Success

While you’re cultivating this harmonious ETA Culture of owner-employee respect and loyalty, as a business owner you should be on your guard against known dangers. I’ve developed three rules for ETA Culture success, and if you don’t guard against them you’ll exhibit poor culture, poor employee relations, and bad leadership.

Rule #1 – Say What You’ll Do & Do What You Say

If you tell customers that you value open communication and employee loyalty, but you do the opposite by scanning through emails on your phone when your customers or team members voice better ideas on how to operate, what good does that do for you? If you’re no willing to say what you’ll do and do what you say, you’re going to lose good team members and customers.

Rule #2 – Get Greedy

I once say a business owner that could care less about their profits or their employees, and it showed all throughout the organization. If you want to be a great Entrepreneur Through Acquisition, get greedy! Let your customers and employees know that you value them and are willing to do whatever it takes to keep them satisfied.

Rule #3 – Get Help

Entrepreneurs Through Acquisition are great at a lot of things, but building company-wide morale may not be one of your particular strengths. Know your strengths, and your weaknesses. My best advice when it comes to weakness management is to off-load the responsibility. In other words, hire someone that has your weakness as a strength of their own.

The ETA Culture Strategy

ETA Culture for owner-employee relationship success exposes your company’s core values. So how do we cultivate or build good culture habits and values within your company? We take care of our employees. Here are some ways you can build-up their morale:

  • Reward the behavior you want to encourage
  • Applaud those who portray the values you want to achieve
  • Promote positive re-enforcement instead of punishment
  • Recognize and increase responsibility
  • Be kind
  • Keep it real up in the ETA field

SUMMARY

You love the idea of being an Entrepreneur Through Acquisition. It’s a complicated landscape to try and navigate. In this post we’ve explored ETA Culture and the rules for success and strategy for making employee-owner relations a success. A company with strong values and a strong culture, one that promotes strong owner-employee relations, will make more money and more reward than a company who has poor values or culture.

Sam Palazzolo

Filed Under: Blog Tagged With: acquisition entrepreneur, acquisitions, entrepreneur, entrepreneurship through acquisition, ETA, ETA Culture, mergers, Mergers & Acquisitions, sam palazzolo, tip of the spear ventures

Startup vs Acquisition – A Comparison of Two Entrepreneurship Models

March 9, 2021 By Sam Palazzolo, Managing Director

Often, when entrepreneurs ask the difference between startup vs acquisition, they are confounded by the differences and can’t make up their minds about which choice is right. They often think that there are clear winners and losers in terms of an entrepreneur’s success or failure. The truth is that there are subtle differences between startups and acquisitions. For starters, it’s not the size of the company that makes the difference between a startup and acquisition; in many cases, it’s the lack of a market or the size of the market that makes the difference.

Startup vs Acquisition

The differences between a startup and an acquisition vary primarily based on the size of the target market. A startup may be started to fill a need in the marketplace; that is, it was created to address a problem that existed in a segment of the population that had not been well served by established companies before. For instance, many new food stores started as franchises that expanded to meet the needs of a local market. In such cases, the company’s success came from its ability to serve a specific segment of the population.

The Acquisition

With acquisitions, on the other hand, the objective is much different. Buyouts are done primarily to acquire control of already mature companies with long-standing operating systems, market shares, and patents. While these companies may have the necessary attributes to be attractive targets for a startup, they are unlikely to have strong market shares or a profitable business model.

Sustained Growth & Profitability

An acquisition occurs when a business owner takes control of a company that is doing well in the market but lacks the ability to sustain growth and profitability. As the buyer, you typically don’t acquire a startup with the intention of developing it into a successful business yourself. Instead, you look for a business that can help you realize your financial goals. This can mean developing the company further to bring it closer to the goal you’ve set, or it could mean acquiring a company with complementary assets.

Startup vs Acquisition: The Key

The key to both startup and acquisition is finding the right partners. Acquiring a startup is easier when you purchase a successful company because you already know what it’s capable of. On the other hand, you’ll have a lot of work to do when buying an established business. Take for example the purchase of an organization (and we see this all the time at Tip of the Spear). At the time when the purchase was made, Company #1 was the largest company in their sector and had already demonstrated its ability to grow and profit. Therefore, making Company #2 in a desirable position to purchase/acquire Company #1.

SUMMARY

Because of the Startup vs Acquisition — A Comparison of Two Entrepreneurship Models, it’s easier for one company to acquire another company. By using a strategy for its acquisition, an organization can quickly became a dominant player in the industry. This type of acquisition will work best for entrepreneurs and venture capitalists with a proven track record in developing successful businesses. However, if you’re starting from scratch, it’s probably a better option to go for a startup rather than an acquisition (Don’t get me started on how hard it is though!)

Sam Palazzolo

Filed Under: Blog Tagged With: acquisition, acquisition entrepreneur, acquisition entrepreneurship, entrepreneurship, entrepreneurship through acquisition, sam palazzolo, startup

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