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Buy then Build: How Acquisition Entrepreneurs Outsmart the Startup Game, by Walker Deibel
Ever thought of going out on your own? Starting something new and exciting? Become the next BIG THING? This energetic entrepreneurship is what the nation needs!
However, startups have an inherent flaw: they mostly fail.
Even with overwhelming talent, outstanding early product trials, and an all-star team, success is still unlikely. The reality is that somewhat more than 99% of all startups either fail completely, or never really amount to much.
Even startups funded by venture capital (VC) – the ones every MBA startup strives for – have a 75% failure rate, despite the quality of input that comes with the funding. (Since VCs work on a portfolio of investments, the 25% might make the 75% failures irrelevant.)
Making it work
What makes Walker Deibel’s book so exciting is that there is a viable alternative (good!) that he has succeeded at many times (better!) and that can be tailored to your circumstances (best!)
Being an entrepreneur doesn’t necessarily mean taking a unique idea and starting a business from the ground up. If you have never had a sudden moment of insight which leads you to wanting your own startup, you can still experience all the challenges and rewards that come with being an entrepreneur.
Acquisition entrepreneurship (AE), occurs when you buy a company and run the business. This is becoming increasingly common in the US as interested parties buy someone else’s startup company and run the business. 2016 saw an 8.6% annual increase of this practice.
The AE is a combination of the existing small business’s profitable and sustainable infrastructure, with the innovation and drive of an entrepreneur. Existing companies already have customers, brand awareness, employees, and most importantly, revenue and profits—everything a startup doesn’t have!
Simply by buying a company, typically one with revenues greater than $1m, (about R8m in South African terms, based on purchasing power parity) you can remove so much of the risk inherent to entrepreneurship.
This is a fresh approach that comes with a new mindset and skillset for entrepreneurs. It involves skills such as managing, innovating, and growing the company from day one.
AE is more affordable than you think. The opportunity of raising money from a bank means that you get to own 100% of the company yourself.
"Like all business professionals, acquisition entrepreneurs need to be a hybrid of investor and entrepreneur," explains the author. The investor mindset needs to evaluate whether this is a good financial decision, and to analyse the business opportunity. The entrepreneur has to simultaneously focus on innovation.
As an entrepreneur, you will need to be looking for an opportunity that is a fit for you, as well as something that has personal interest.
Know how you'll win
Gary Vaynerchuk, the Belarusian American online wine critic, took over his parents’ liquor store. Seeing an opportunity to sell wine online, he took revenues from $3m to $60m by applying his online marketing skills.
In South Africa, there are anywhere between 20 000 and 40 000 SMEs that are worth investing in. Many, I suspect, are owned by people who are coming to the end of their careers and who may be potential sellers.
To start on your AE journey, you will need to seriously begin the very first step: clarify what you have financially and emotionally, and what you want to own. The small business will be your investment vehicle which you must be suited to and drive well, to allow you to finish big.
"Knowing why and how you will win before you start, is critical to knowing what game you are looking for in the first place," the author suggests. About a third of the variants for success are simple competencies of attitude, aptitude, and action style.
Then you can choose the type of business you wish to own. Is it one that is ‘eternally profitable’ because it serves a need that is very unlikely to go away? These ‘cash cows’ generally have very small growth opportunity, but also small threat of industry disruption.
A ‘turnaround’ is a tremendous place to create value if you are strong in operations, and have a great understanding of financial reports and managing cash flow. The company usually has fallen on hard times, but through re-engineering, failure can be corrected – though not without many hard decisions and heartache.
Acquisition with ‘high growth in revenue and earnings’ indicates a clear demand for the product or service, and the company is doing well at delivering it. If you can sustain growth it is desirable, because you are going to pay more for the company, adding significant risk and debt in the acquisition process.
A ‘platform company’ refers to the first company you purchase in a specific industry, because you intend to grow it further through acquisition. The question here is "How will you grow it?"
Some acquisitions will play well to your skill as an operational expert, others to your marketing or sales prowess.
"You first identify your strengths, then match it to the growth opportunity the potential acquisition offers," Deibel advises.
Identifying this clearly is the first part of what will become your target statement, after which you can identify your target.
The critical part
Now that you know which type of company you want to purchase, you’ll need to identify the target’s Seller Discretionary Earnings (SDE), the measure of how much total cash flow the seller of the firm has been enjoying.
Defining what you want to acquire by revenue shouldn’t be how you define your target, because to be an AE, what you are buying is the cash flow. This should be a critical part of your target statement.
The author doesn’t place much store in the industry as the choice driver for many people. "I believe that industries all have similar characteristics and are more alike than different."
However, ‘limiters’ - what you will not get involved in, are required in your target statement. This may be geographic relocation, or what you would not own, for example a principle decision if you are a vegetarian.
A full and clear target statement, including how much you can invest, by when you WILL have the acquisition, will greatly help you in your search. Instead of having to search the internet where the quality companies are too quickly snatched up, and only the weak and profitless reside, you can use intermediaries.
They will be impressed by your preparedness – the full extent of which is clearly spelled out in this well-constructed and practical book.
Readability Light ---+- Serious
Insights High +---- Low
Practical High +--- Low
Ian Mann of Gateways consults internationally on leadership and strategy and is the author of Strategy that Works and Executive Update. Views expressed are his own.
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