The Hidden Risks of Business Acquisition: Lessons from a Failed ETA Journey

Business acquisition through entrepreneurship through acquisition (ETA) has become an increasingly popular path for aspiring entrepreneurs. However, the risks involved are often underestimated or overlooked. In this article, we'll explore the valuable lessons learned from Jed Morris, a former Air Force veteran and MBA graduate who experienced a failed business acquisition firsthand.

The Journey Begins: From Air Force to ETA

Jed Morris's journey into the world of business acquisition began during his MBA program. After a decade of service in the Air Force, where he gained experience in financial management and acquisitions, Morris found himself drawn to the concept of entrepreneurship through acquisition.

He immersed himself in research, attending conferences and reaching out to successful searchers. The idea of acquiring an existing business with proven cash flow and customers appealed to him, especially compared to the uncertainties of a startup.

Defining the Buy Box: A Crucial Step

One of the key steps in Morris's search process was defining his "buy box" - the specific criteria he was looking for in a potential acquisition. His criteria included:

• Industry focus: Defense tech or defense-enabled services
• Geographic location: Southwestern United States, preferably California
• Revenue: Flexible on recurring vs. project-based, as long as there was a diversified customer base and consistent cash flow
• Size: Targeting the higher end of the SBA loan spectrum, potentially up to $8-10 million with additional financing

Morris also made a conscious decision to be flexible on certain aspects, such as owner involvement in the business. He believed his background and skills would allow him to address this common concern effectively.

The Search Process: From Tech to Landscaping

Initially focused on the defense and IT sectors, Morris found himself pivoting to the landscaping industry almost by accident. He discovered that landscaping was a highly fragmented industry with potential for consolidation and growth.

After meeting several business owners in the space, Morris identified an opportunity to acquire a project-based landscaping construction company. This led to an unconventional arrangement where he essentially "interned" with the business for several months before making an offer.

The First Acquisition: A Promising Start

Morris ultimately acquired the landscaping construction business for just over $400,000, with a structure of one-third cash and two-thirds seller financing. The business had annual revenue of around $1.2 million and estimated seller's discretionary earnings (SDE) of approximately $170,000.

Within weeks of closing this first deal, Morris was approached by other local landscaping business owners interested in selling. This led to a rapid second acquisition just five weeks later - a commercial landscaping maintenance company of similar size.

The Pitfalls of Rapid Expansion

While the strategy of combining project-based and recurring revenue streams seemed sound, Morris now acknowledges that he moved too quickly. The challenges of integrating two businesses, managing cash flow, and dealing with unexpected issues proved overwhelming.

Some key lessons from this experience include:

1. Don't rush into multiple acquisitions: Take time to fully understand and stabilize your first business before pursuing add-ons.
2. Understand the cash conversion cycle: Morris underestimated the complexities of managing accounts receivable and the time it takes to implement changes in payment processes.
3. Be prepared for unexpected costs: Insurance premiums, for example, can increase significantly under new ownership.
4. Recognize the learning curve of ownership: Even with relevant experience, becoming a business owner involves a steep learning curve in decision-making and leadership.

The Harsh Reality of Business Failure

Ultimately, Morris's business venture failed, resulting in significant personal and financial losses. He estimates the total cost at around $750,000 in out-of-pocket expenses, plus additional liabilities.

Key takeaways from his experience and interviews with other failed business buyers include:

1. Seller misalignment is a major risk: In 65% of the cases Morris studied, issues with the seller were a primary factor in business failure. This includes outright fraud or misrepresentation in about one-third of cases.
2. Cash flow management is critical: Understanding and managing the cash conversion cycle is essential for business survival.
3. Market risks are real: Approximately 25% of failures were due to unexpected market changes or "black swan" events.

Lessons for Aspiring Business Buyers

Despite the painful experience, Morris remains optimistic about the potential of ETA. He offers several pieces of advice for those considering this path:

1. Thoroughly assess the risks: Understand the potential consequences of failure, including personal guarantees and bankruptcy.
2. Don't overlook red flags: Trust your instincts if something doesn't feel right about a deal or seller.
3. Gain hands-on experience: Try to work in or closely observe the business you're considering buying before making an offer.
4. Focus on making the first deal successful: Don't overleverage or skip important due diligence to save money.
5. Be prepared for the unexpected: Even with thorough planning, there will always be unknowns in business ownership.

Conclusion: Turning Failure into Valuable Lessons

While Jed Morris's ETA journey ended in failure, his willingness to share his experience provides invaluable insights for other aspiring entrepreneurs. By understanding the potential pitfalls and taking a more measured approach, future business buyers can increase their chances of success in the challenging world of acquisitions.

Morris is now working on a book titled "Buyer Beware: Lessons from Failed Business Buyers," which aims to shed light on the often-overlooked stories of business acquisition failures. By learning from these experiences, the next generation of entrepreneurs can approach ETA with a more realistic understanding of the risks and challenges involved.

Ultimately, Morris's story serves as a reminder that while entrepreneurship through acquisition offers exciting opportunities, it also requires careful planning, due diligence, and a willingness to learn from both successes and failures in the business world.

Article created from: https://www.youtube.com/watch?v=gjKyM8EpB-0