When people envision their path to success, they often consider rising up through the ranks or launching a startup. However, there is a very viable third option: acquisition entrepreneurship.
Let’s take a look at these three development courses and compare the relative benefits and risks of each.
In general, rising up through the ranks is perhaps the least risky of the three but is also likely to yield the smallest return in terms of financial benefit.
The startup has the potential to yield a huge return but is also very risky.
The so-called third path, acquisition entrepreneurship, is often overlooked but can yield a significant financial benefit while being a lot less risky than many people consider.
What are traditional career paths?
There are two main traditional career paths when people think about how they want their professional life to develop.
Let’s take a look at these two before moving on to acquisition entrepreneurship.
Working up through the ranks
The most commonly pursued career path is what might be called the “working hard” model. That is, simply getting a job in a chosen field and working your way up through the ranks into an upper-level position before ultimately retiring.
You don’t have any ownership as an employer per see, and you might bounce around between companies or even fields over the course of your working life.
You aim to quietly put away a percentage of your income to save for retirement.
Startups: from garage to global titan
The other commonly considered path is the startup, launching your own endeavour from the ground up. Taking a business venture from your garage into a world-spanning tech juggernaut.
Several high-profile examples of this, particularly in the tech world, have emerged to highlight this second traditional path.
Think of founders like Facebook’s Mark Zuckerberg, Twitter’s Jack Dorsey or Apple’s Steve Jobs. Entrepreneurs who became billionaires (sometimes seemingly overnight) became global industry titans.
What is acquisition entrepreneurship?
The so-called third path to success is that of an acquisition entrepreneur, where you purchase an already existing business and focus on growing what has already been established.
In very simple terms, an entrepreneur needs to identify a business that fits their investment plans, negotiate a value purchasing price and then contribute meaningful operational experience to strengthen the business over time.
Many of the small businesses in the United States are owned by baby boomers, lots of whom are set to retire in the coming years and looking for potential sellers. This represents a huge potential market of already established, successful businesses.
There are a variety of ways to pursue this course, so let’s take a quick look at a few paths to acquiring an already-established business.
- Self-funded search: This is the most common search model and is exactly what it sounds like. Entrepreneur seeks out and purchases a business on their own without any outside financial help from a third party.
- Traditional search fund: In this model, capital is raised from outside third parties. Investors typically expect to receive preferred equity in the acquisition equal to 1.5x to 3x their investment.
- Sponsored search: The entrepreneur partners with an investment firm which provides all the capital and, therefore, remains the controlling shareholder and controls the board of directors.
Acquisition vs traditional career paths
Working your way up into the c-suite is probably the least risky of these three paths. If the business you work for fails, you can always get a new job at a different company or in a different field.
However, it is also likely to have a medium impact on your quality of life. You’ll probably be expected to put in many hours if you want to rise through the ranks.
You don’t have any ownership in the company, so you don’t see any benefit as it grows outside of pay raises, bonuses and perquisites.
The startup approach is likely the riskiest of all three but also comes with the greatest potential reward. It is, after all, possible to hit on the next big idea and become a billionaire.
However, the vast majority of startups ultimately fail, and the owner has likely contributed a significant amount of personal assets to get it off the ground.
The failure rate for startups in their second year is 30 percent, for example.
Burnout is also rampant in the startup community, particularly the pressure from third-party investors and the stress of being responsible for the livelihood of all startup employees.
The often overlooked acquisition entrepreneur model might be the most optimized regarding risk and quality of life.
Purchasing an existing business with an already established market need and customer base is inherently less risky than starting from scratch.
According to the Pikes Peak Small Business Development Center, entrepreneurs who buy an already successful business have a 90% to 95% chance of still being in business after five years.
If you’re looking to self-fund your search, you can often put less down than you would like using programs like SBA loans.
Owning the business also means that your net worth grows as the business does because you have an equity stake in the business. (The actual percentage can vary depending on what approach you take.)
You can also aim to have the business largely self-sufficient after 3-5 years by hiring the right managers and employees.
Conclusion
No matter which course you choose, no is without risk so make sure you understand your risk tolerance before settling on one path or the other.
Working your way through the ranks is relatively risk-free but yields the lowest financial gain. Startups are risky but rewarding. Acquisition entrepreneurship has less risk than startups but also has a relatively large financial return over the long term.
If you’re interested in starting your own acquisition journey, it all begins with Acquira’s Accelerator Program. If you’d like to learn more about the program, schedule a call today with one of our representatives, who will get back to you within 24 hours.