Buy Then Build: How Acquisition Entrepreneurs Outsmart the Startup Game

by Walker Deibel

Instead of having to raise money for months (often years) while also trying to build sales from scratch with a new product, the acquisition entrepreneur acquires a profitable infrastructure from which to begin.

Simply by buying a company, typically one greater than $1 million in revenue, you can remove so much of the risk inherent to entrepreneurship.

There is a lot of opportunity inside small companies that operate on legacy systems, never upgraded to lean business models, or never developed sales teams or effective online marketing.

This too was funded by the cash flow of the business I had already acquired.

There are roughly 500,0003 small businesses acquired each year. These acquisition entrepreneurs are skipping the startup phase altogether, unlocking trillions in value, and living the successful entrepreneur lifestyle.

Banks offer loans to buyers for up to 90 percent of the purchase price, using the assets of the business as collateral. Remember I mentioned raising capital takes a fraction of the time? The financing of these deals is typically done in one fell swoop, with you bringing a “down payment” or “equity infusion” and the bank providing the balance. In addition, raising money from a bank also means that you get to own 100 percent of the company yourself.

in all, buying a business is way more affordable than you think. In terms of initial capital required by the entrepreneur, it looks amazingly comparable to either starting a company or buying a house. Let me explain. Babson College statisticians reported through the Wall Street Journal that the average startup in the US kicks off with $65,000 in invested capital. Similarly, the average down payment on a home for the last three years5 was approximately $57,000, with the twenty-five counties experiencing the biggest increase in millennials6 averaging $66,174. So, whether people are starting a business from scratch or buying a house, they are investing somewhere around $65,000. Because companies under about $10 million in revenue tend to sell for lower multiples than middle-market or publicly traded companies, a $65,000 investment, paired with a 90 percent loan backed by the small business administration, could buy a company generating over $1 million in revenue, immediately launching an acquisition entrepreneur into the role of CEO of one of the largest 4 percent of companies in the US.

An existing company with legacy systems and an outdated path to success has just as much need for innovation as a startup does. As a result, those who can recognize and execute this can capitalize on the benefit of an existing platform to build in the “new company” they wish to run.

It’s the combination of innovation and existing customers that wins in the war of disruptive technologies.

Further, an astounding 91 percent of everyone having over $5 million in net worth owns their own company—a trend suggesting that the wealthier someone is, the more likely they are to own a business.

Owning your own business is not only an opportunity to provide value through products and services, but it’s arguably the best way for most people to build real wealth.

While considering acquisitions as an investment, keep three fundamentals in mind: return on investment, margin of safety, and upside potential.

When evaluating a potential acquisition, the cash flow the company generates is what sets the sale price of the company. It’s the driver behind the valuation and ultimately what you’re paying for. Anything outside of the company’s ability to generate cash is commonly not worth paying for at all. At its core, what you are buying is an asset that provides cash flow.