Entrepreneurship Through Acquisition; An Excellent Veteran Business Pathway

I was listening to a podcast recently (I cannot recall specifically which one), but they were discussing the concept of Entrepreneurship Through Acquisition (ETA). It is buying a small, established company to build upon rather than going through the full startup process and churn.

The key concepts here are that the ETA model is generally:

  • Less risky.
  • Established Market and client base.
  • Established processes and procedures.
  • A going concern financially

Linking this to the transitioning veteran community, the ETA approach is perfect for most transitioning personnel. There are a lot of considerations for a transitioning veteran that, at least from my observations, boils down to three main things:

  1. Loss of purpose.
  2. Loss of tribe.
  3. Loss of stable income.

While this list can have elements added to or removed from it, they form the central themes of what a serving person has and then suddenly may not have. Small business ownership can effectively fill the void of most of those things.

The purpose when you are the master of your destiny is incredibly fulfilling. Don’t get me wrong, it is rarely easy, but the feeling of ‘eustress’ (basically good stress) is closely aligned with that when your military team is under the pump and getting work done.

Similarly, you get to build your team around you to accomplish your organisational objectives and apply some of the key skills you would’ve learned whilst serving. This lends itself to the ‘tribe’ building and social connectivity.

Lastly, the stable income may or may not be filled. This will depend on the purchased business, where it is on its boom/bust cycle and whether you are living within or beyond your means.

The process of transitioned/transitioning from service member to business owner is a path that many have trodden before, and they will always be there to help. The steps below are the method of conducting a business acquisition. I’ll highlight some key points for each.

Establishment of intent to proceed

  • During your transition, think of where you want to be and why (I wrote this article a while ago, which may help).
  • Once you have found the ideal business or industry, you’ll need to do some work to find a business. I advise finding someone who intends to sell, but only after a period of time.
  • Open a dialogue with the current business owner and find a path to ownership change. I would include some expectation management; a rough price point is established now.
  • Engage a financial planner (to discuss your 10 – 15-year financial horizon) and an accountant (to build out the ideal corporate and personnel asset risk reduction structure).

Finance

  • Firstly, none of this is financial advice—just things to consider.
  • Find a business broker to help you access financial arrangements for the buyout and keep them in the loop throughout the process. Make sure you are comfortable with them.
  • Now is a pretty average time to take out loans (business loan interest rates could be 7% or higher), but depending on how you structure the debt, the interest and bank fees will be tax deductible.
  • Get pre-approval so that you are confident of your financial position once negotiation commences.

Due Diligence

  • It will be time for due diligence when the business purchase is approaching.
  • You’ll need accountants and solicitors to assist you in compiling the information required to make a decision.
  • Ensure that your diligence is thorough and targeted. Remember, once you take ownership of the company, you, as the director, will be personally liable for any ongoing issues. This means your house or other assets could be targeted. A thorough risk reduction strategy (from point 1 above) should enable you to minimise.

Negotiation and valuation.

  • In point 1, you would / should have spoken about a rough figure that each party is willing / is after. Next is valuation.
  • Valuation is its discipline in business, and depending on the industry, it will vary. I won’t be able to go too much into it, but you will have book value (i.e. assets including cash on hand owned by the company) and goodwill (intangible assets that hold value, such as reputation, etc.).
  • Ongoing business may also be of value (for example, 18-month-long contracts are a reliable source of revenue), as are staff and other overheads in the business. It’ll all come down to product, market, and business model.
  • Next comes the fun part. Sitting everyone in a room, including solicitors and accountants, to duke it out. Have a very good idea about what you are and are unwilling to compromise. Remember the motives of the person selling (are they retiring? Do they just want out? Is this one of several businesses they own?). All these considerations will impact their negotiation strategy.
  • One of the key considerations in the negotiation strategy is maintaining your relationship with the person in the room. Depending on how you got to this position, they may be a mentor, a friend, or someone who helped you through your transition. You must retain that relationship, but remember that it is business… You must be willing to walk away.
  • Be ready to pay. Fees associated with negotiations and contract establishment are hexy. For a small company buyout, you may see 20 – 30k just in legal and accounting fees split over the two parties. Talk about who will pay and have that agreed to before going into the room.

Transition

  • This should be it! you’ve done the hard parts. Now, it is just the transition of ownership (more lawyers), ASIC notifications and removal of directors (more accountants) and bank transfers (brokers, accountants and solicitors).
  • I would have plans in place to protect you from anything in the past of the business biting you in the ass (superannuation, leave entitlements, tax obligations, loans, etc.) that may not have been uncovered during due diligence.
  • Come up with a plan to transition management of the company, ensure employee turnover is minimised and that there is no risk of the previous owner establishing a competing business.

Thanks for reading, everyone. As always, I make myself available for a chat at any time.