fbpx

Tip of the Spear Ventures

Venture Capital | Private Equity

acquisition entrepreneurship

Startup vs Acquisition – A Comparison of Two Entrepreneurship Models

By

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

Acquisition Entrepreneur – Art or Science?

By

The Point: We’re often asked about our Mergers & Acquisitions business specifically, “How can I be an Acquisition Entrepreneur?” The reality is that most entrepreneurs that take on an acquisition are not born that way, they are trained to do so. If learning is at the forefront, what else is involved in the background? So, in this post we’ll explore the Acquisition Entrepreneur – Art or Science… Enjoy!

Things to Consider As an Acquisition Entrepreneur

The acquisition of a business is often thought of as the same thing as buying an existing enterprise, however, there are several key differences. An acquisition can be more difficult for some entrepreneurs because of their inexperience and limited financial resources. Acquiring businesses involves a series of steps.

No Cowardly Lions!

The first step to successful acquisition is having the courage to buy a business. There is often fear among investors that if they invest in a startup it will fail. This is not true. The reason for this is that successful entrepreneurship is built on sound principles, strong leadership, and an excellent business plan.

You are an Investor

To buy a business, investors require information about the owner. They want to know the entrepreneur’s personal and professional background. This includes information on the founders, the current business model, and the products or services offered. Having this information allows investors to evaluate the potential acquisition more objectively.

What Does the Business Do Well?

Investors also look for the strength of a business. In addition to a strong business plan, an entrepreneur should have experience in his field. Additionally, he should show that he has the ability to manage and grow a business. In addition, it is important for a start-up to demonstrate how the business will survive during tough times. These can be difficult to assess when a company is still in the development stages.

What is the Legacy of the Business — and You?

When buying a company, investors look for companies that are well-established and that have a solid financial footing. It is also important for the entrepreneur to convince potential investors that he is capable of managing the business. By conducting a survey of the company and its current location, he can show investors that he knows where he is going. He can also convince potential funding sources that he has a great idea for making the company successful. If he is able to generate interest from interested funding sources, he may find himself able to buy the company more easily than he had originally expected.

Time is the Great Equalizer

Another important thing to consider when it comes to being an acquisition entrepreneur is the time line for making a successful acquisition. Most companies that are interested in buying a business develop interest over time. However, it is not always easy to close a deal at the right price and time. As a result, some companies prefer to wait to make an acquisition until they have more negotiating power. This gives them a better chance to get a good deal on the business. On the other hand, a strong acquisition entrepreneur knows that he needs to quickly close a deal so he needs to be ready to negotiate with all of his potential funding sources.

SUMMARY

In this post, we’ve explored the topic of Acquisition Entrepreneur – Art or Science. We know that there are a lot of ways in which you can explore your entrepreneurial spirit. Becoming an acquisition entrepreneur is a smart way of doing so.

Sam Palazzolo

Five Tips For Becoming an Entrepreneurship Through Acquisition

By

The Point: Being an entrepreneur is great! However, the saying, “Work smart!” should be a tactical advantage with a strategy of buying a business being front/center! I see time and again entrepreneurs that start a business from scratch — and that’s just plain hard work! In this post we’ll explore Five Tips For Becoming an Entrepreneur Through Acquisition (ETA)… Enjoy!

You do not need to begin a new business from scratch in order to become an entrepreneur. In fact, purchasing a company with which you are familiar could be a wiser choice. Creating, marketing, and then selling companies are all a part of your entrepreneur s journey. There are certain things you will want to keep in mind when looking into purchasing a company, though. Below are four tips for becoming an entrepreneur through acquisition.

Tip #1 | Entrepreneurship Through Acquisition

The first and most important step to becoming an entrepreneur is being able to finance your business. Financing is crucial to making any business work, but it is even more critical when you are just starting out. If you are working with a limited budget, your options may be limited. In order to get everything lined up, you will want to begin working with a lender as soon as possible, particularly if you intend to use credit cards or other forms of capital. When you are seeking seller financing for your business, you will have to provide substantiation of your income, a solid plan for increasing your sales, and a clear plan for paying back the loan.

Tip #2 | Entrepreneurship Through Acquisition

The second step in becoming an entrepreneur through acquisition is finding a seller financing program. Most traditional banks do not look favorably on businesses that have never made a profit or do not have a history of revenue. In order to get everything lined up for your business, you will have to secure funding from either a bank or a private investor. A good real estate investor will be especially helpful because he or she can get you loans with a lower interest rate than what you can get from a bank.

Tip #3 | Entrepreneurship Through Acquisition

The third tip to becoming an entrepreneur through acquisition is to make sure you can make a profit on your investment after your first acquisition. The ideal scenario would be to purchase a business with low start up costs and high revenue potential. Most businesses fail shortly after they are launched. If you cannot turn a profit on the first sale, you may have to take a loss on every sale thereafter until you break even.

Tip #4 | Entrepreneurship Through Acquisition

The fourth tip to becoming an entrepreneur through acquisition is to consider a gradual increase in profits over time. An entrepreneur does not simply buy a business with the best potential for revenue and expect a huge windfall from it the next day. Business development takes time and effort. Your job during the early stages of your business venture is to generate customers and build a strong relationship with your suppliers.

Tip #5 | Entrepreneurship Through Acquisition

The fifth and final tip to becoming an entrepreneur through acquisition is to consider starting your own company as a small business. When you start your own business, your goal is to have low start up costs, high annual revenue, and a strong customer base. This means you will have a limited amount of resources to work with in terms of finances. Starting your own business can be extremely difficult if you do not have a comprehensive business plan in place. You must set a budget and identify your target market to determine how much money you can invest in your new business venture.

SUMMARY

In this post we’ve explore Five Tips For Becoming an Entrepreneur Through Acquisition (ETA). If you’re ready to put the strategic advantage of acquisition — buying a business — to work for you instead of starting one from scratch, success is still going to be hard work. However, the outcome can be much more advantageous.

Sam Palazzolo

Acquisition Entrepreneurship – Selecting Professional Advisors

By

If you’re a leader thinking about making a change in your career, a new MBA looking to launch into leadership, or maybe a seasoned entrepreneur through acquisition you know that the road to identifying an organization to purchase is littered with the corpses of  those that did not conduct thorough enough due diligence. In this series, Acquisition Entrepreneurship, I’ll tackle the topics that will make your journey on that road less risky on the way towards successful acquisition of a new entity. In this post, we’ll explore the Professional Advisors recommended to assist you towards acquisition… Enjoy!

Acquisition Entrepreneurship Selecting Professional Advisors

Selecting Professional Advisors

An Accountant and a Lawyer are two of the most important advisors you’ll want to engage during your due diligence phase in acquisitions. You should look for those accountants and lawyers skilled in working with similarly sized firms as the one you’re exploring (Typically, those that work with smaller firms).

The accountant should have familiarity with smaller firm’s accounting practices, including payroll taxes, sales tax, and noncash expenses such as bad debt reserves or accruals for sales force bonuses earned yet paid. The accountant should have well established protocols to quickly determine if the company has accurately accounted for these expenses.

The lawyer should know which contracts are successfully in play at the acquisition and typical terms and conditions therein. This could be the same lawyer that assisted with creating your Letter of Intent (LOI) as well as prepares the final acquisition documents.

Professional Advisor Fees

While accountant and lawyer fees typically vary, depending on geography and especially with the purchase of an organization that can last several months to a year, you could expect that accounting due diligence will cost somewhere between $20,000 to $50,000. The reason there is such a large range provided is that the cliché “it depends” is in play regarding how much work needs to be done to understand the company’s true financial picture.

Legal due diligence is more tightly focused and includes the cost to prepare purchase agreements and related documents. The fees one can anticipate typically are in the $50,000 to $75,000 range.

One last note on professional advisor fees, specifically contingency. In other words, you may want to see if both accountants and lawyers will work on a contingent basis and therefore get paid at the time of closing so that you won’t have to come out of pocket during the due diligence phase. Keep in mind that some professional advisors will do so, some won’t work on contingency. The bottom line is that you typically get what you pay for so select wisely but don’t eliminate these all too important professional advisors!

Other Professional Advisors to Consider

In addition to accountants and lawyers, there may be other professional advisors that you want to bring in while conducting due diligence. I’ve hired engineers to come and inspect manufacturing equipment, IT consultants to inspect software development, Environment consultants to gage appropriateness of the wet excavation procedures, and Marketing consultants to ensure accuracy in market potential was accounted for. Depending on your entrepreneur through acquisition strategy and the organizations you’re considering, it’s important to bring in the professionals at time of due diligence well before you officially take ownership (Again, it’s better to walk away from the acquisitions table because of issues identified by professional advisors than to sit at it and go hungry for a period of time because you didn’t employ them!)

SUMMARY

Acquisition Entrepreneurship is a great way to explore your entrepreneurial spirit and look to “buy then build” an organization (As opposed to the typically thought of entrepreneurial methodology of a startup). Regardless of the industry you’re looking in and the size of the organization therein, you want to ensure that you have the best team of professional advisors employed to serve you. This will help with risk mitigation regarding your entrepreneur through acquisition strategy.

Sam Palazzolo

PS – I’m typically asked what our Acquisitions Strategy is at Tip of the Spear. As such, we have summarized our Acquisitions Criteria here on our website: https://tipofthespearventures.com/acquisitions/. Please review and let me know if I can be of service.