Don’t Start a Company, Buy One

APRIL 19th, 2024

Becoming a successful entrepreneur is a dream many cherish, but the reality is often daunting. Statistics show that around 65 percent of new start-ups fail within the first ten years,

with the figure climbing to a staggering 90 percent over the long term. Despite these odds,

there is a smarter and less risky path to entrepreneurship: acquiring an existing company.

Why Acquisition Makes Sense

When we talk about start-up success, it’s crucial to understand the risk/reward ratio.

Successful venture capitalists (VCs) and angel investors mitigate risk by diversifying portfolios, knowing that a significant portion of their investments may not yield returns. VCs meticulously select start-ups, with a VC-backed start-up seeing a much lower failure rate of around 35 percent.

On the other hand, acquiring a company presents a compelling opportunity. A 2022

study by the Stanford Graduate School of Business reveals that out of all the search funds that are started and acquire companies, an impressive 73 percent achieve success.

These ventures typically boast an Internal Rate of Return (IRR) ranging from 30 percent to

35 percent, offering unparalleled returns compared to traditional start-ups.

Types of Acquisition Models

Acquiring a company involves distinct stages: funding your search, identifying potential targets, negotiation, managing and growing the company, and eventually exiting or returning the investment. Here are three primary models for acquisitions:

Traditional Search Fund Model: Involves fundraising (typically around US$300k from ten investors) to finance a 2-year search period. Investors then have the option to invest in the company identified by the searcher (but not the obligation), who assumes the role of CEO and works towards growth and eventual sale.
Self-Funded Search: This model relies on personal funds for the search phase, with the option to seek investor funding post-negotiation. It appeals to individuals with personal capital, those targeting smaller companies, or individuals managing acquisition with a full-time or part-time job on the side.
Sponsored Search: Involves sponsorship from a company, family office, or fund, with specific criteria set by the sponsor. While it streamlines funding to a single investor, it limits autonomy in choosing the target company.

Global Trends in Acquisitions

Recent trends indicate a growing international interest in acquisitions. The technology and business services sectors remain prominent, with a notable increase in median acquisition prices from US$10 million to US$16.5 million. This trend underscores the attractiveness of acquisitions as a lucrative business strategy.

Acquisition Without Upfront Capital

Contrary to popular belief, acquiring a company can be achieved without significant up-front capital. Creative deal structuring, strategic partnerships, and leveraging existing assets can facilitate deals with minimal financial exposure. As an example, the first acquisition I did, I invested around US$25k, considering the search phase and the initial investment in the acquisition.

Personal Experience and Expertise

Drawing from personal experience in acquiring and searching companies across multiple regions including Guatemala, LATAM, USA, and Spain, I’ve navigated various deal structures. Through direct sourcing and co-investment strategies, I’ve gained insights into successful acquisition practices.

In conclusion, while the entrepreneurial journey is fraught with challenges, strategic acquisition presents a compelling alternative. By leveraging existing resources, understanding diverse acquisition models, and staying attuned to global market trends, aspiring entrepreneurs can navigate toward sustainable success.

For further insights or assistance with acquisitions, feel free to reach out. Let’s unlock entrepreneurial opportunities together.

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