Entrepreneurship Through Acquisition: On the rise but no cause for concern

“Entrepreneurship Through Acquisition (ETA) is a fast-growing trend in M&A and we’re beginning to see the pipeline of work building in this area considerably,” says David Baverstock, corporate partner at law firm Marriott Harrison. With ETA on the rise, we investigated how it could affect the wider M&A market.

ETA emerged from Stanford Business School in the early 1980s and involves buying an existing, typically stable, business to run and scale. Also known as search fund transactions, many MBAs pursue Entrepreneurship Through Acquisition instead of starting a business from scratch.

There was a record number of ETA transactions in the US in 2016, according to online small business marketplace BizBuySell. More recently, ETA has grown in popularity in European M&A.

ETA is predominately growing in the south east of the UK, says Oli Wilson, head of commercial lending at Shawbrook Bank, which has seen enquiries for ETA transactions increase over the past two years. “We are, however, starting to see ETA growing in major business hubs across the UK.”

Carl Lundberg, partner at Gerald Edelman, the chartered accountancy and business advisory firm that hosted the ETA awards, the first of its kind for the industry, says ETA deals have been keeping the lower-mid M&A market going over the last couple of years. “The number of companies that are ripe for such transactions is significant and the barriers to entry for investors are relatively low when compared to traditional private equity, whilst the returns on offer are extremely attractive.”

ETA’s impact

Baverstock, who has been closely monitoring this growing trend, says, “For the wider M&A market, it provides some competition for private equity and trade buyers, but the deal values are likely to be lower. You could almost look at it as ‘Baby Private Equity’ in what is a very fragmented market, ripe for consolidation.”

Wilson adds that ETA deals are often off-market deals, where the searcher has actively engaged a business owner who may not have been considering an exit or one who may have been exploring their succession options and found ETA to be a viable alternative route. He says, “The liquidity involved in ETA deals frequently falls below a value that would interest traditional PE houses, meaning these types of deals are typically not in competition with larger companies.

“However, having a searcher lead the process by sourcing the deal and taking the business forward post-transaction does give PE houses and high-net-worth investors the ability to invest in smaller companies that may not have been operationally sound at the point of sourcing,” he adds.

“Searchers able to successfully present themselves as solid custodians of businesses may also be able to differentiate themselves from interested PE houses,” says Baverstock. “This competition may be good for sellers, especially in the current market where there is considered to be a scarcity of good businesses coming to market.”

What’s next?

As millions of small business owners reach retirement age in the largest world economies, entrepreneurship through acquisition is likely to accelerate in the coming years, according to research published in the European Management Journal.

“We’re seeing a rising number of search funds created specifically to focus on acquisitions in the SME bracket. The Baby Boomer generation is retiring at a rapid pace, and many are looking for exit strategies, which has created a large pool of potential acquisition targets,” says Baverstock.

However, the European Management Journal study also found that finding investors to contribute to a search fund was challenging for entrepreneurs. Very few investors and companies had heard of the search fund business model, whilst searchers had difficulty finding attractive acquisition targets.

“The pool of investors who understand the asset class is small,” says Lundberg. “As ETA continues to grow across Europe, the heads of those investors, who might otherwise have had capital to deploy in the UK, are being turned to other regions where ETA is at an earlier stage of growth, or where those investors perceive there to be an opportunity for higher returns.”

Wilson expects dealmaking activity to pick up as the macro economy continues to improve. Inflation is now less than half of its October 2022 peak of 11.1%, although the base interest rate remains at 5.25%.

“We can attribute a lot of this increase to better awareness of ETA, which has been largely driven by motivated searches having access to ETA programmes at major business schools,” continues Wilson. “Simultaneously, we have also witnessed better awareness of ETA by the investor community who support such deals. Often this comes in the form of a previous searcher investing in a current searcher.”

Baverstock says with a wider variety of investors taking an interest, “we may see more traditional VC or lower mid-market PE backing searchers.”

“Ultimately, a growth in ETA activity is a positive thing for the wider M&A market and expands the exit options for vendors who run smaller but profitable businesses,” concludes Wilson.