IG#34: The Best Way to Found a Business is to Buy One

Nobody in Germany is talking about this:

Acquisition Entrepreneurship.

The idea is simple: instead of founding a new startup, you acquire an existing one and take over as CEO.

This has several advantages:

• The business already exists and is incorporated
• The business has a product or service that others want, as evidenced by that fact that ...
• The business has paying clients
• The business has a team of operators in place

When you found a startup, you start from scratch:

• Figuring out which problem to solve
• Building a first prototype of the product or service
• Finding your first clients without an existing brand
• Hiring a team of operators

This is the stage where most startups fail. There are simply too many unknowns in the process.

The best way to reduce that risk of failure?

Acquiring a startup that has already solved 90% of the reasons startups fail: market risk and technology risk.

Makes perfect sense.

So why isn’t anyone doing this?

There are 3 obstacles:

1. How do I finance this?
2. How do I make money with this?
3. How do I find the right business to acquire?

All valid questions.

Before we dive in, here's your mandatory disclaimer that this is not financial advice, might be a risky investment, and is for informational purposes only. Interact with this information at your own risk.

[1] Financing

Financing can be easier than you’d assume. Most businesses don’t sell at crazy SaaS multiples.

Instead, you’ll likely pay an EBIT multiple in the range of 3-6, depending on the industry and the business.

Here's how you finance it:

• A 250k EBIT business might cost you 1M in purchasing price.
• You take out a loan for 80% of this with a ten-year payback period at 8% interest.
• Seems like a lot of money, but you’re buying a cashflow-generating asset - so finding a bank that will grant you that loan is possible.

This leaves 20% of equity investment. If you can’t afford this yourself, you can raise funds from family, friends, or outside investors.

Or ... you could get seller financing.

• Basically, this means that the seller receives 80% of the sale price upfront, and the remaining 20% over, say, two years.
• For the seller, this shouldn’t make too much of a difference. He already has 800k in hand; whether he receives the remaining 200k now or in 1-2 years is a minor issue.

You've now financed the acquisition without spending a dime of your own money.

But you have a loan to pay back and a seller to pay out. Time to make some money.

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[2] Making Money

Let’s look at the end of year 1 in a conservative case:

• Business continued to do 250k in EBIT.
• You pay 64k in interest on your loan.
• You pay 80k payback on your loan.
• You pay 100k to the seller.

This leaves you with 6k in profits (before taxes). Which means your entire first payment has been covered from the cashflow of the company.

Now, let's assume you’re a great operator. You acquired this business not to own it, but also to grow it.

With your skills, you increase EBIT by 25k in year 2.

Now, you have 275k in EBIT, pay 80k on the loan, 57k interest, another 100k to the seller.

This is already 38k in profit, and the seller has been paid back completely.

With that out of the way, EBIT skyrocket:

• Year 3: 144k profit
• Year 4: 150k profit
• (Etc.)

So even if the business doesn't grow any further, you have a highly cashflow-positive business that pays for itself.

Compare this with a real estate investment: very few apartments will generate enough cashflow to cover interest + loan payments.

You could flip it, but not without significant taxes.

(You can also flip companies. PE funds have been doing this for years.)

You could also found your own business. Feels nice and plays to the ego.

But how long will it take you to get to 250k in profit?

Longer than if you acquire a business, for sure.

So let's find a business to acquire.

[3] Finding a Business to Acquire

It’s a buyer’s market out there.

In Germany, ​560.000 small and medium businesses will need someone to take over​. 190.000 of them might close down their established, proven businesses - because they can’t find anyone to run it.

Due to Germany’s demographics, there are simply less people out there to run it.

And many of them are risk-averse, want to build their career as social media influencer, or shy away from taking responsibility.

Even the ones who think entrepreneurially would rather start from scratch.

The same applies to most parts of the Western world, including the US - where Acquisition Entrepreneurship is already going strong.

Do the non-consensus thing in Europe.

Acquire a company instead of founding one.

Call To Action

If you know of anyone looking to sell their business, please point them my way.

While I'm currently exploring new opportunities, acquiring & running a business is one avenue I'm very excited about.

Alternatively, you should consider acquiring it yourself.

BONUS: The Best Resources to Learn about Acquisition Entrepreneurship

Check out these two:

1. Read the book "​Buy, Then Build​" by Walker Deibel. This is the bible of Acquisition Entrepreneurship.
2. Follow Codie Sanchez' newsletter at ​contrarianthinking.co​. She's popularized Acquisition Entrepreneurship in the US, and is an outstanding writer.

You may have noticed two things:

1. The newsletter looks different than normal. This is because I'm currently testing out a different email software (ConvertKit), because I'm a bit unhappy with Substack.
2. This was a really business-y newsletter. Please let me know if you enjoyed this format, or if you'd rather go back to the usual self-optimization content.

To acquiring instead of founding.

LFG 🤝

Dominik