Last month, I had the opportunity to attend the Booth-Kellogg Entrepreneurship Through Acquisition (ETA) and Harvard Business School ETA conferences. The focus of the conferences is to discuss the search for, operation of, and investment in small businesses. I happened on the space earlier this year and have since been captivated by it.

I am captivated by the ETA opportunity to 1) offer my future employees great respect/dignity 2) improve the community that the business serves 3) grow my professional skills 4) have greater autonomy over my personal/professional life, and 5) earn a strong ROI. I hope to acquire and operate a small business in the next few years..

Today, I am working towards that end as a Chief of Staff under a search fund portfolio business in Orlando, FL. I have learned a great deal and hope to earn one or two more similar roles in the next###-###-#### months, to de-risk myself as a future operator, before launching a self-funded search.

I attended these conferences to learn more about the ETA space as a whole. Below are my takeaways from each session; I hope they add as much value to you as they did to me. I’m always learning, so if there is any other insight you can offer on these topics, please chime in in the comments.

Overall Takeaways

1) People, culture, and hiring are one of the most important things in a business. But it is also one of the biggest blindspots a searcher will have when buying a business

2) Be extremely intentional about who is on your cap table and on your board; they can add tremendous value or be a constant source of trouble

3) Have an industry focus. Focus on industries that outpace GDP, become an expert in these industries, and stick to niches. This adds confidence to all parties involved in the search for, transaction of, and operation in the business

Booth-Kellogg - Current State of Search

1) Search is a very personal decision; go after what what’s important to you, not just what everyone else is doing

2) Create a model that incorporates the impact of the covid bump (for either positive or negative impact) in revenue/EBITDA for truer valuation

3) Having a tight industry thesis/expertise (past experience, trade show networking, etc.) goes a long way with building trust with a seller; be an industry expert

Booth-Kellogg - ETA Case Competition

1) Don’t forget the human component when considering the different growth levers to pull; the CEO must figure out how to have buy-in from stakeholders (employees, customers, suppliers, BOD, investors) so that they will not only stay, but help the organization grow through the transition

2) Think about the people in the industry you’re interested in; are they the type of people you want to spend everyday with?

3) If there is a seemingly obvious huge upside in a business, (ex. expansion into a new market) there may be a reason why it hasn’t been done yet (ex. high costs, bad product/market fit, exhausted owner). Think through and try to disprove assumptions

Booth-Kellogg - Current State of Operating

1) Build a board with diverse skills and backgrounds who can help you. Make sure they bring value, they’re someone you want to work with, and someone you couldn’t necessarily get regular help from unless they were on your board

2) Set aside equity for management during the transaction, but before handing it out, learn what motivates them. It may be career growth, improved benefits, or a CEO who cares; not necessarily equity

3) Plan to spend most of your time working IN the business, but schedule regular time to think/work ON the business

Booth-Kellogg - Current State of Investing

1) There is plenty of capital available for great assets, be picky about who you want on your cap table; they’ll have great influence on you. Then, don’t max out leverage to provide downside protection when things don’t go to plan

2) Buy businesses with sustainable, repeatable, reliable growth. Best if they have repeatable, recurring revenue

3) When doing tuck-ins/M&A with a platform business ask: will the people in the two companies get along culturally? Integration is tough, what cost/revenue/commercial synergies exist? From the start, is the platform business sustainable on its own in case there is no future M&A?

Booth-Kellogg - Academic Panel

1) ETA has great room for growth; ~$1B went towards ETA in 2021 when the buyout equity market is $380B/yr. At most, 200 ETA transactions took place last year when there are millions of businesses that fit normal ETA size profiles in the USA

2) Get into ETA because of a love of operating, control, and leadership; wealth creation is a byproduct, but shouldn’t be the entrepreneurs main ‘why’

3) To do well in ETA, there must be strong relationships in three places: 1) Entrepreneur and Seller 2) Entrepreneur and Investors 3) Among the Investors

HBS - Opening Keynote, Royce Yudkoff

1) ‘There are riches in the niches’

2) Learn what a good company looks like, and look for it. But ask, ‘how good is good enough?’ to not get stuck searching for anything less than perfect

3) Searching is like starting a sales company; fill the top of your funnel constantly, then cut bad deals quickly and as early as possible

HBS - Industry Thesis Think Tank

1) 95% of searchers have an industry focus (usually either an industry + opportunistic strategy or a multiple industries strategy). Having a focus gives the searcher additional credibility and deeper knowledge which aids in building a strong thesis. Having an industry focus will help the searcher identify adjacent industries that might not have been previously known

2) Identify an industry that will outpace GDP growth, best case if 2x+ GDP growth. Don’t waste time on small/late-stage industries

3) Once an industry is identified, be active in it to earn expertise and learn of opportunities. Go to conferences, tradeshows and symposiums. Subscribe to industry newsletters/blogs and connect with their authors. Ask questions, look for pain, find/create the solutions

HBS - Talent + Culture in a Small Business

1) Always be recruiting; this is where the CEO will share vision and build out a management team that will create culture. This will take a lot of time, and done poorly, is one of the easiest ways to mess up the business. Look past simply hiring on LinkedIn/Indeed, but go to where thought leadership will be (conferences, hackathons, etc.). Know that the best talent will prioritize their own professional growth over everything else, play to this by offering growth opportunities

2) The largest asymmetric risk during the buying process is the business’s people/culture; there often is not a good way to gauge this before close. Though, many businesses are built with the values of the seller, which can be indicative of the culture/talent

3) Lean into the old adage of ‘hire slow, fire fast.’ Once you have great talent, to retain them, understand employee’s professional and personal goals/objectives, then help them get there

HBS - Structuring a Self-Funded Deal

1) To improve a seller’s confidence in certainty of close with a buyer’s finances, 1) have a letter of interest from multiple banks 2) have letters with soft offers for funds from investors, can be just 2-3 sentences, 3) have confidence, do what you say you’ll do, and be professional. These things go a long way in building trust with sell-side stakeholders

2) Biggest thing to pay attention to for the searcher is the debt service coverage ratio (DSCR); likely with a SBA 7a loan with a personal guarantee, this is how much wiggle room a new CEO has to work with when things go sideways. DSCR should be as high as reasonably possible

3) Have hardest conversations with seller early; quality of earnings (QoE) analysis should focus on items that are most likely to break the deal

HBS - Work-Life Integration as a Search CEO

1) Work/life integration = being present in both work and life

2) Acquire great cash flow, then use some of the cash to hire a great team who can take ownership of responsibilities around the business. This will aid in improving everyone’s, including the CEO’s, work/life balance

3) Set boundaries, act intentionally, and ask for help (personally and professionally)

HBS - Closing Keynote, Karen Moriarty

1) Find small banks who are excited to lend in specific arenas, then use each one in those spaces

2) Be okay with letting people go; ask: ‘knowing what you know today, would you hire this person for this role?’

3) On boards: 1) the board is somewhere between a coach and a cheerleader, 2) have at least a couple of members who are operators, 3) know what needs approval and what doesn’t; have a good idea of governance early on, 4) know what you want from the board before building it out