The traditional image of entrepreneurship often involves a brilliant idea, a garage, sleepless nights, and a high-stakes gamble on creating something entirely new. While the allure of the disruptive startup remains strong, a different, increasingly popular path is emerging: Entrepreneurship Through Acquisition (ETA).

Decoding Entrepreneurship Through Acquisition (ETA)

At its core, ETA flips the startup script. Instead of building from zero, an ETA entrepreneur identifies, acquires, and takes over the leadership of an established company. These businesses typically have a proven track record, existing customer base, established processes, and, crucially, positive cash flow.

The appeal is clear. Acquiring a stable business sidesteps many uncertainties inherent in launching a new venture, such as finding product-market fit or building initial traction. Unlike startups that often burn cash for years, acquired businesses usually generate revenue and profit from day one post-acquisition. The entrepreneur inherits infrastructure, employees, and market presence, providing a platform for growth rather than needing to build everything from scratch.

While ETA can be pursued independently, it’s most commonly associated with the search fund model.

Understanding Search Funds

A search fund is an investment vehicle specifically designed to support an aspiring entrepreneur in their quest to find, acquire, and lead a private company. The model typically unfolds in two stages:

• The Search Phase: A small group of investors provides initial capital to the searcher. This funding covers the searcher’s salary and expenses months while they hunt for a suitable acquisition target. Criteria often include stable industries, recurring revenue, strong profit margins, and opportunities for operational improvement or growth.
• The Acquisition Phase: Once a promising target is identified and a purchase agreement is negotiated, the initial investors are given the pro-rata right (but not the obligation) to invest the much larger amount of capital needed to complete the acquisition, often alongside debt financing. The searcher then transitions from searching to operating, taking the helm as CEO of the acquired company.

Investors are drawn to search funds because they back a motivated individual to find and operate a business, often in less competitive, smaller markets than typical private equity targets. The searcher benefits from mentorship, capital access, and the opportunity to become a CEO and significant equity holder much earlier in their career than might otherwise be possible.

How ETA Generates Returns

The financial success of an ETA venture hinges on the entrepreneur’s ability to not just maintain but enhance the acquired business’s value. Search fund returns are on average 40%-40.5%, as noted here, and are typically generated through a combination of factors:

Operational Improvements

Implementing best practices, professionalizing management, optimizing processes, improving sales and marketing efforts, and leveraging technology can significantly boost efficiency and profitability.

Strategic Growth

Pursuing organic growth (new products, services, or markets) or inorganic growth (bolt-on acquisitions) can scale the business rapidly.

Leverage

Acquisitions are often financed with a significant portion of debt. If the business performs well, the equity holders (investors and the entrepreneur) benefit disproportionately as the debt is paid down and the enterprise value grows. However, leverage also magnifies risk if performance falters.

Multiple Expansion

Sometimes, a well-run, larger, and more professionalized business can command a higher valuation multiple upon exit than it was acquired for.

Search fund returns have been the subject of significant study, most notably by Stanford Graduate School of Business, which has tracked the asset class for decades. However, it’s crucial to understand the nuances:

Distribution is Wide

While the average search fund returns are high, performance varies significantly. Some funds fail to find a company, others acquire businesses that underperform or fail, resulting in losses for investors. Conversely, highly successful acquisitions can generate exceptional returns (10x+ MOIC).

Data Limitations

While Stanford’s studies are the gold standard, they rely on self-reported data and capture a significant, but not exhaustive, portion of the search fund universe.

Past Performance is Not Predictive

Market conditions, competition for deals, and valuation multiples change over time. While historical search fund returns demonstrate the model’s potential, future results are not guaranteed.

Despite these caveats, the consistently strong historical data on search fund returns underpins the continued interest from both aspiring entrepreneurs and investors.

Weighing the Potential of ETA

Entrepreneurship Through Acquisition, often facilitated by the search fund model, presents a compelling alternative to traditional startups. It offers a structured path for talented individuals to acquire and lead established businesses, leveraging existing cash flows and market positions. The potential for wealth creation is significant, underscored by strong historical search fund returns that have often outperformed other private investment classes.

However, ETA is demanding. It requires resilience during the search, sharp analytical skills during acquisition, and strong leadership post-close. The risks are real, and success is far from guaranteed. For the right individual—typically someone with management experience, financial acumen, and a deep desire for operational leadership—ETA offers a unique opportunity to build significant equity value and achieve entrepreneurial success by growing, rather than starting, a business. The track record suggests the rewards can be substantial for those who navigate the journey successfully.