A Brief History of ETA: Where it started, where it is now, and where it’s headed

This essay includes opinions and predictions of many different professionals in the ETA space. It is a long article, so get comfortable and grab some coffee. There’s a moment in all emerging movements when the insiders know something the world doesn’t yet. The main idea will have enough critical mass to feel inevitable from the inside, but it’ll still look eccentric from the outside. Pickleball in 2018, CrossFit in 2008, sourdough in###-###-#### Whether or not the trends stick around depends on the continued adoption of these ideas and adaptation to the changing world (thankfully, we’re no longer trapped inside and forced to bake bread to stay sane). Entrepreneurship through acquisition (ETA) is transitioning from that eccentric to established phase. For decades, this path to ownership has existed in the background of American business. The small, mostly institutional community was largely unknown to the ambitious people who might have benefited most from it. Then, over the last decade, something changed. Right around 2018, the idea started to spread. Is pickleball a correlation or causation? We may never know. But what we do know is that a once-niche strategy is becoming (almost) mainstream. This is a deep dive into how that happened: where ETA started, where it stands today, and where the people building it think it’s going. QOE Prep supports buyers and sellers making one of the biggest decisions of their lives by providing timely, thorough quality of earnings reports. Learn more by signing. Link in comments. Part One: Where it started###-###-#### to 2018) To understand ETA, you have to go back to the ‘80s, in a classroom at Stanford Business School. Professor Irv Grousbeck is credited with originating the search fund in###-###-#### It would allow people without much capital to raise a modest fund from a group of investors. They could then use that money to cover a salary and deal expenses for a year or two while looking for a business to buy. When they found one, the same investor group had the right of first refusal to fund the acquisition. It was, in essence, a way to democratize leveraged buyouts. The institutional private equity firms of the era were buying companies, installing operators, and generating strong returns. Grousbeck’s insight was that a talented individual could do a version of the same thing with the right structure and backing. Grousbeck got to prove himself right, which is why we’re talking about him here. He backed a deal in the 1990s called Assurant, which went on to become a multibillion-dollar company. His son, Wick Grousbeck, parlayed generational wealth from that world into ownership of the Boston Celtics. Despite this, the model stayed small. Stanford University became the intellectual home of traditional search funds, pumping out a handful of practitioners each year. Harvard Business School built its own branch of the movement, centered around two professors, Rick Ruback and Royce Yudkoff, who wrote what became the closest thing to a Bible the ETA community had: The HBS Guide to Buying a Business. Year after year, the two schools produced more searchers and refined the playbook. They had some small conferences, and that was mostly it for a long time. The Wharton ETA Microcosm “I don’t think the space had really grown that much from the ‘80s to the mid-2010s,” says Gary Chalik, who would later become one of the people responsible for bringing ETA to a new generation. “When I learned about it in 2017, there just wasn’t a ton of resources.” Gary came from investment banking. He’d spent years covering private equity firms and understood leverage buyouts at an institutional level. What he hadn’t known was that individuals could do something similar on their own. You could just leave banking, go to business school, and come out the other side as an owner-operator of a real business, without having to first accumulate a fortune. So Gary did what you do after an aha moment. He went deep. He applied to business schools with an eye toward building a network in the ETA space. Before business school, he worked inside a traditional search fund, doing cold calls with potential sellers. It was a formative, if sometimes frustrating, experience. The traditional search model had its perks: a built-in investor network and structure, as well as a salary while you were searching. At the same time, it had constraints, such as only looking at larger deals that weren’t necessarily local. Gary eventually chose Wharton and, with it, a different kind of opportunity. While Harvard and Stanford had built real ETA ecosystems, Wharton had Paolo. Paolo was a second-year student who’d organized a small vertical within the school’s private equity and venture capital club dedicated to ETA. It had a few small events and investor relations. Gary partnered with Paolo with the goal of making the ETA community at Wharton its own thing. They launched the Wharton ETA Club as an independent organization. They got the approval from the administration, built out a leadership team, started pulling together alumni who’d gone down this path and hadn’t been formally connected to each other. Today, the club now has over 300 members and hosts the annual Wharton ETA Conference, which now has a waitlist to get in. On top of all that, two of the people they connected, Jim Vesterman and Charbel Zreik, eventually became adjunct professors, teaching what is now one of the most popular classes at Wharton based on their experiences as searchers. Much of the growth of the ETA movement can be likened to Wharton ETA’s own growth. Part Two: Where it is now###-###-#### to today) In 2018, a man named Walker Deibel published a book called Buy Then Build. Its release is the moment most people in ETA point to when they try to explain how things changed. Although the groundwork of the book had been laid four decades before, Buy Then Build translated Grousbeck’s work into language anyone could understand. The work essentially lit the fuse that kicked off the ETA movement. “I’d say 2018 was probably the infancy of it,” says Tim Ericson, who runs an ETA-focused investment fund. “And it’s been sort of snowballing and accelerating from there.” Tim came to ETA from the opposite direction of most people in the space. He’d spent fifteen years running a venture capital-backed startup, raised $40 million, scaled the business, and sold it. When he considered going back to the VC-backed startup world, he quickly remembered how hard it was. “The 0 to 1 is just as hard the second time around,” he says. “You learn a little bit, but it’s still just as hard finding product-market fit.” A friend, who had left venture and bought a few van rental businesses, told him to read Buy Then Build. He spent an entire summer consuming everything he could find on ETA: the book, podcasts, blog posts, community forums. Will Smith’s Acquiring Minds podcast became a touchstone. By the fall of 2022, he’d enrolled in the Acquisition Lab. Within two months, Tim was under LOI on a business within two months of starting the program. He closed the deal in May 2023, ran it for a year and a half, and then started doing what came naturally: investing in other people doing the same thing. Tim’s story is one of the defining patterns of the current moment. It starts with a founder discovering ETA, buying a business, and then becoming a resource for other people buying businesses. The community, by all accounts, is something special. “One of the things that has stood out to me is how tight-knit the ETA community is,” says one observer of the space. “It seems like everybody knows everybody and cares about each other.” The infrastructure around this community has started to look, in some ways, like what you’d expect from a maturing industry. There are now at least 12 investment funds (that we know of) focused on the sub-$2 million EBITDA small business acquisition space. More and more universities are launching ETA curricula. The Acquisition Lab, born out of the self-funded search world, has grown to run cohorts of 15 to 25 entrepreneurs a month. A Tale of Two Models Two search models have taken form over this period. The traditional search fund or the Grousbeck model still exists and still works well for a certain kind of searcher. It lets someone who’s early in their career and not tied down to location go out and chase down larger deals. Meanwhile, the second model, the self-funded search, has grown enormously and in many ways now defines the popular conception of ETA. Self-funded searchers use their own capital (often combined with SBA loans) to buy smaller businesses. The tradeoffs are real. A traditional searcher gets a salary, a network, and a structure. A self-funded searcher gets flexibility and ownership. As Gary puts it, it depends on who you are and what you’re optimizing for. “If I was not married and didn’t have kids and I went down this path straight out of business school, I would probably do a traditional search,” he says. “Just because of the structure it provides.” The self-funded search allows people to take a more granular approach to vetting potential businesses. Grant Hensel at Entrepreneurial Capital identified one trend that might be overlooked by anyone focused solely on the bottom line. He said that “searchers don’t fully appreciate how valuable it is to put cash on the balance sheet at close to serve as working capital and as a buffer against the unexpected.” Even though it might not look as pretty in Excel, the risk profile of a small business acquisition that starts with $100,000 vs. $500,000 cash in the bank is dramatically different. While a traditional search fund is capable of identifying the same risk, the self-funded searcher can get more creative with the terms and ultimately hold more control over what exactly they’re looking for. Jordan Fliegel, CEO of Acquisition Lab talks about “a third intermediate approach between traditional search and self-funded search named ‘Investor-Backed Search’ where a searcher is still buying a business with an SBA loan and owning the majority, but they also have 6 or 7 figures of outside capital from minority investors.” In other words, it’s not purely binary. This nuance between traditional and self-funded search is what Acquistion Lab Capital and Entrepeneurial Capital lean into. The combination of both models, plus the community infrastructure around them, has created something that a decade ago simply didn’t exist: a clear, accessible, well-documented path for ambitious people to become business owners without starting from scratch. Part Three: Where This Is Going If we flesh out the comparison of ETA to VC about 20 years ago, we might be able to get a glimpse of how things will turn out in the coming decade or so. The VC world had been around for a while, it went through this massive phase with Techstars and Y Combinator. This grew into a handful of funds in the U.S. and eventually an entire ecosystem. Much of this is due to the dotcom bubble and Silicon Valley startups creating a gold-rush effect. ETA has some similar tailwinds. Two in particular stand out. The first is what the ETA community has taken to calling the “Silver Tsunami”. The baby boomer generation built an enormous number of small businesses: HVAC companies, plumbing outfits, specialty manufacturers, local services of every kind. Now they’re retiring, and their kids, by and large, don’t want to take over. For decades, this meant businesses simply closed. ETA offers an alternative for the higher echelon of these companies. “You’re really providing an exit opportunity to retiring owners,” Gary says. “Whether it be retirement or other reasons for sale, they’re able to realize some kind of perpetual value for their life’s work. And you’re taking the business and putting it in the hands of somebody who’s hungry.” However, ETA is best for a company that is already financially healthy. Lenders are increasingly wary of lending on any but the least-risky-looking deals. Nella Bloom, an M&A attorney, says “only the most-organized and most-profitable companies are able to sell their assets these days. Solvent companies with good quality of earnings and salable assets, which don’t depend on the owner’s involvement, are salable these days. There’s a lot of ETA inventory, but not a lot of good ETA inventory. And owners are seeing the difference when they receive offers.” The second tailwind is AI, and it cuts in a more counterintuitive direction. The AI wave is, paradoxically, good for ETA. Not because AI is going to power a new wave of SaaS-style startups, but because it’s going to make the startup world much harder to win. There’s so much capital being poured into this space that it’s extremely difficult to be successful, given the competition. If you’re a talented person trying to figure out where to build a career and potentially get wealthy, the expected value calculation of starting an AI company is worse than it’s ever been because of how many jobs are up for grabs. At the same time, no prompt is going to fix your leaky faucet or patch your driveway. The essential services that ETA buyers typically acquire are not going to be automated away (or the robo-plumbers are at least further out than the social media manager agents). They require human beings, locally, doing physical things. Which means demand is structural and ROI is much more tangible. As a result, more and more big players like private equity firms are jockeying for a spot at the table. The competition from private equity is real, but it isn’t a death sentence for the individual searcher. As Oliver Bogner at the Advisory Investment Bank points out, “PE aggregators love the lower middle market.” They’re buying platforms at 5–10x and bolting on smaller businesses at 3–6x, which means searchers in high-activity sectors like HVAC, pest control, and fire and life safety are increasingly going head-to-head with institutional money. Big fish in a big pond As the ETA ecosystem matures and capital becomes easier to access, many industry participants believe the market is beginning to move up-market. Searchers who once focused almost exclusively on smaller owner-operated businesses are pursuing larger, more operationally mature companies. “As investor capital becomes more accessible in ETA, searchers naturally start hunting for bigger deals,” says Joe Spina, an M&A lawyer active in the ETA space. “Those businesses are usually more sophisticated and professionalized, with less dependence on a single owner. That’s where I think the market continues to move over time.” The differentiator is the operator angle. A PE-backed platform acquiring a subscale business from a truly retiring owner is going to want a management team in place, and they’re not sending one of their own people to run a two-truck plumbing outfit. A searcher who can say “I’ll be there day one, short transition, no earnout” is offering something institutional capital structurally cannot match. This opportunity isn’t lost on the talent pool. “People coming out of top MBA programs at Harvard aren’t looking to go into investment banking anymore,” Tim Ericson says. “They’re looking to buy a plumbing business in their hometown. The shift, just in the last five years, has been amazing.” One M&A lender we spoke to, Shem Doupe, predicted that there will be “a wave of wealthy parents guaranteeing business acquisition loans with their children in place of paying for their college education.” Doing so would push them directly into business ownership after getting some real-world experience. As the return on investment of a college degree drops, many of these parents will see an AI-proof businesses as a better opportunity for their kids. Tim’s own fund runs an Entrepreneur in Residence program that is also banking on this trend: they make contractual capital commitments to top-tier searchers before even seeing the deal, allowing people who might be leaving significant salaries at Amazon or Google to step confidently into acquisition mode. A word to the wise There is, of course, a cautionary note embedded in all of this. Venture capital’s expansion was driven by more participants, more capital, more competition for deals, which, in turn, produced some bad outcomes. There was plenty of consolidation between firms and concentration in the allocation of resources, leaving funds chasing after marginal deals. There are early signs of a similar trend forming in ETA. Already, roll-ups account for the vast majority of acquisitions. Ask anybody who’s been searching, and they’re practically guaranteed to either be years into the process or not very happy with their purchase. Unfortunately, there are more unfavorable deals being done. Tim has spotted a pattern with the newer wave of searchers: people who have been looking too long and who want badly to buy something will start rationalizing away red flags because the seller said something reassuring. The antidote, in his view, is professionalization. His fund, along with M&A lawyer, Joe Spina, launched PACT, a set of standardized deal documents for small business acquisitions, in conjunction with six or seven other investment firms in the space. The explicit model was Y Combinator’s SAFE note, which standardized early-stage startup investing terms and made it dramatically easier for founders and investors to move quickly without reinventing the wheel every time. That said, in terms of professionalization, the ETA world isn’t there yet. There are still too many founders who discover the idea in isolation and plenty of deals done without proper support. The industry could benefit from more structure, and it’s trending that way. The people inside it have a good sense of where things are going. I’m from the SBA and I’m here to help We spoke with Lisa Forrest at Northwest Bank about the trend. She said, “Many buyers today are taking a harder look at maximizing the amounts of leverage that the SBA might allow. We’re starting to see more discernment and patience with our clients that are pushing for more appropriate structures.” So, while there is plenty of opportunity, there is also the risk that things spin out of control. Lisa applauds the caution searchers are demonstrating. By avoiding max leverage, Lisa says that you should be more likely to maintain enough DSC room to allow for the J-curve and to afford growth. While SBA can be a godsend for many searchers, it is not one-size-fits-all. Angel Rosario, an SBA relationship manager, says that the structure of search funders and SBA loans may not always be a great fit. It’s an involved and ever-changing program. “We will always need full personal guarantees, may have to place a lien on primary residences, need life insurance on borrowers, and if a search fund group has any foreign ownership it makes the loan ineligible.” Just recently, the SBA changed its policy so that only US citizens can utilize the program. While some banks may be able to navigate these structures and associated risk, Angel points out that it isn’t easy, especially when millions of dollars are at play. On the credit decisioning side, Goran Pavlovski of AWG Capital Advisory sees a similar shift through a different lens. He said, “The largest SBA lenders have pulled back from specific industries where 2021 to 2023 vintage paper underperformed, and newer lenders with credit leadership poached from those same legacy shops are picking up the well-structured deals the incumbents won’t touch.” In other words, there’s a surface narrative that SBA credit got harder. Goran says that what’s really happening is a redistribution of appetite across the lender landscape. He also notes that lenders have tightened their fit criteria for searchers, after seeing weak portfolio performance where buyer background didn’t match target operational demands (for example, a recent Harvard economics grad trying to buy the nearest HVAC shop). That’s why his firm presses on searcher-to-target fit early in the process. Some deals going unfunded deserve to. The rest are good deals at the wrong lender, and a clean quality of earnings paired with a well-run debt process is usually what separates a business that gets funded from one that does not. Conclusion The ETA movement started in a Stanford classroom four decades ago. Since then, it’s grown slowly, gaining momentum until exploding onto the scene in###-###-#### The window, as best anyone can tell, is still open. It remains to be seen how far along the growth curve we are. While ETA is becoming more popular, buyers have to still vet each deal and make sure they are worth it###-###-#### was a particularly hard year to buy a company due to many small businesses being less profitable than they were in###-###-#### A downward trend in earnings causes, lenders, investors, and buyers to be more cautious when buying companies. For now, our work at QOE Prep is to support buyers and sellers making one of the biggest decisions of their lives by providing timely, thorough quality of earnings reports. If you want to learn more, go to our website or set up a call with our founder. I also wanted to say thank you for making it this far in the article and an even bigger thank you to everyone who contributed. Subscribe below to get more emails like this. Where do you see ETA going this year?