Mastering Small Business Acquisitions: Insights from a Serial Entrepreneur

The Journey of a Serial Business Acquirer

In the world of entrepreneurship, there are many paths to success. One often overlooked route is the acquisition of existing small businesses. This strategy, while not as glamorous as starting a company from scratch, can be incredibly rewarding and lucrative. Today, we'll delve into the experiences and insights of Walker Deibel, a serial entrepreneur who has successfully acquired 10 companies outright.

From First-Time Buyer to Expert

Walker's journey began in 2004 when he started looking for his first business to acquire. It took him two years to find and purchase that initial company, which he then ran as CEO for seven years. This business, with $8 million in revenue and just under 50 employees, was eventually sold to an acquisition target in 2013.

Between 2013 and 2016, Walker's acquisition pace accelerated dramatically. He bought six companies during this period, followed by two more between 2016 and 2023. This extensive experience has given him unique insights into the world of small business acquisitions.

The Isolation of a Non-Traditional Path

During the early years of his journey, Walker felt isolated and misunderstood. The prevailing entrepreneurial narrative of the time focused heavily on Silicon Valley startups, venture capital, and IPOs. Buying existing small businesses was seen as an unusual and even questionable strategy.

Walker recalls a party where he was introduced as someone who "buys and sells companies." While this sounded impressive, he felt it didn't capture the essence of what he was doing. This experience highlighted the need for more education and awareness about the benefits and challenges of acquiring existing businesses.

Why Deals Don't Close: The Three B's

In Walker's experience, there are three main reasons why small business acquisition deals fail to close:

1. Bad Deals
2. Bad Brokers
3. Bad Buyers

Let's examine each of these factors in detail.

Bad Deals: The Unregulated Market

One of the primary challenges in the small business acquisition space is the lack of regulation. The market for businesses valued under $25 million is essentially unregulated, with no oversight from bodies like the Securities and Exchange Commission. Some states require brokers to have a real estate license, but this does little to ensure quality or standardization in the industry.

This lack of regulation leads to several issues:

• Inconsistent documentation: Many small business owners don't maintain thorough records or financial statements.
• Lack of standardization: Without established best practices, the quality of information and processes can vary widely from one deal to another.
• Hidden problems: Issues that might be caught in a more regulated environment often don't surface until later in the acquisition process.

Bad Brokers: The 80/20 Rule

Walker estimates that about 80% of business brokers are not performing at a high level. This is partly due to the lack of industry standards and regulations mentioned earlier. The typical broker model incentivizes quantity over quality, leading many brokers to list as many businesses as possible rather than focusing on properly preparing each listing.

A study by Axio revealed some interesting insights into how brokers spend their time:

• Insufficient preparation: Many brokers don't invest enough time in creating comprehensive information packages for potential buyers.
• Lack of best practices: There's no standardized approach to brokering small business deals, leading to inconsistent quality across the industry.

However, Walker points out that this situation can create opportunities for savvy buyers. Poorly packaged businesses often deter casual buyers, potentially leaving hidden gems for those willing to dig deeper and ask the right questions.

Bad Buyers: The Unprepared and Unrealistic

From the perspective of business brokers, bad buyers exhibit several common characteristics:

1. Unfamiliarity with terms and processes
2. Excessive time demands on brokers
3. Indecisiveness or poor timing in decision-making
4. Inability to prioritize information effectively
5. Making unfinanceable offers

Some specific behaviors that frustrate brokers include:

• Interrogating the seller inappropriately
• Attempting to renegotiate terms after reaching an agreement
• Requesting to meet employees before closing the deal
• Asking for excessive information before signing a letter of intent (LOI)

Perhaps the biggest issue is buyers who don't understand the financial realities of acquiring a business. Many are looking for "no money down" deals or misunderstand concepts like search funds. This lack of financial literacy often stems from misinformation spread through social media and other unreliable sources.

The Reality of Business Acquisition

It's crucial to understand that acquiring a business is not a get-rich-quick scheme or a guaranteed path to success. Consider these sobering statistics:

• 90% of people who start looking for a business to buy never actually complete a purchase.
• The process often takes longer than expected, with many buyers giving up before finding the right opportunity.

Walker compares this to the "Hollywood effect," where aspiring actors move to Los Angeles only to find that success often comes to those who can outlast the competition. In business acquisition, persistence and patience are key virtues.

The Acquisition Lab: Bridging the Gap

Recognizing the need for better education and preparation for potential business buyers, Walker created the Acquisition Lab. This program aims to create the largest vetted community of educated and prepared financial buyers in the country.

The Acquisition Lab's approach includes:

1. World-class education: Curriculum designed by experts, including Walker himself, who has taught these concepts at the MBA level.
2. Practical tools and resources: Spreadsheets, stress test models, and other essential tools for evaluating and acquiring businesses.
3. Vetted community: A selective admission process ensures that members are serious and capable buyers.
4. Expert advisors: A team of 14 advisors and a private Slack channel provide ongoing support and guidance.

The results speak for themselves:

• Over 800 members
• 200 closed transactions
• $400 million in total transaction value
• 35% close rate (measured after the first 8 months of membership)

Importantly, the Acquisition Lab is selective, turning away 70-75% of applicants. This ensures that the community remains focused and high-quality.

Key Takeaways for Aspiring Business Buyers

If you're considering acquiring a small business, here are some crucial points to keep in mind:

1. Education is essential: The more you understand about the process, the better your chances of success.

2. Be realistic about financials: "No money down" deals are rare. Be prepared to invest your own capital.

3. Develop patience and persistence: Finding the right business can take time. Don't rush into a bad deal out of impatience.

4. Look beyond surface-level information: Sometimes, poorly presented businesses can be hidden opportunities.

5. Understand the seller's perspective: Building a good relationship with the seller can smooth the acquisition process.

6. Be prepared for due diligence: Know what information you need and be ready to analyze it thoroughly.

7. Build a support network: Connect with experienced buyers, advisors, and other professionals in the field.

8. Stay focused on value creation: Always consider how you can improve and grow the business post-acquisition.

9. Be aware of industry trends: Understanding the broader market can help you identify promising opportunities.

10. Continuously improve your skills: The more acquisitions you explore, the better you'll become at evaluating and closing deals.

Conclusion

Acquiring a small business can be a rewarding path to entrepreneurship, but it's not without its challenges. By understanding the common pitfalls, educating yourself thoroughly, and approaching the process with realistic expectations, you can greatly increase your chances of success.

Remember that persistence is key. Many potential buyers give up before finding the right opportunity, but those who stick with it and continually refine their approach often find success in the end.

Whether you choose to join a program like the Acquisition Lab or pursue your education independently, the key is to approach small business acquisition as a serious endeavor requiring dedication, skill, and patience. With the right mindset and preparation, you can navigate the complexities of the market and find a business that aligns with your goals and capabilities.

As you embark on your journey to acquire a small business, keep learning, stay adaptable, and don't be afraid to seek help when you need it. The path may be challenging, but for those who persevere, the rewards of successful business ownership can be substantial.

Article created from: https://www.youtube.com/watch?v=XITtCHbUo8M