Thread by @levinejm

It's a new year, and a new opportunity to welcome new people to the #SMB community. If you're looking to buy a business and aren't sure where to start, here are a few key terms you'll see on here to help get you started: 🧵

“ETA” is the standard abbreviation for “Entrepreneurship Through Acquisition”, which describes the practice of buying and growing an established small or medium business (SMB).

Buyers can be individuals or small groups, organized into “search funds”. This term refers to an investment vehicle usually formed by one or several individuals (the “searchers”), together with a small group of aligned investors to find, acquire, and lead a privately-held company

The financial metrics used by search funds to evaluate potential deals also have their own peculiarities. For example, SDE, or “Seller’s Discretionary Earnings”, is a concept we really only see in this space. While SDE is similar to EBITDA, there are a few key differences...

For instance, with SDE, the manager’s salary is added back, assuming that the buyer might replace the seller as the owner/operator of the business.

Sellers in the SMB space are usually represented by business brokers rather than investment bankers. Notably, brokers frequently do not have the resources (or name recognition) of investment bankers from large institutions.

Brokers directly manage a business listing placed online. Because the scope of potential buyers consists of individuals rather than a set group of corporate options, business brokers end up spending a good portion of their time evaluating buyers and their ability to transact

Buyer strategies include the “traditional” model, where buyers raise investor funds, buy bigger companies, and hold less equity compared to the self-funded search funds, which primarily use SBA loans to cover the majority of the acquisition costs in a more leveraged transaction.

While these are the primary search fund strategies, additional methods are gaining popularity, including a co-op strategy, whereby the seller’s employees gain ownership over a company and run it through cooperative governance.

There are several strategies searchers can use to find deals. On-market deals are either represented by brokers or for sale by owner. These opportunities are considered “on-market” because they can be found on listings aggregators, broker websites, and broker newsletters.

Often, brokers will market a deal quietly to their internal contacts prior to placing them online. Buyers should try and access these “pocket listings” before they hit the market by building relationships with brokers that are likely to represent deals in their target industries

Buyers can also find off-market deal opportunities, where they contact the seller directly. These transactions can sometimes be more favorable to the buyer than an on-market deal due to less competition, though industry data shows that these deals are less-likely to close.

A top piece of advice we offer to the beginners in the ETA field is to start with a defined list of search criteria. A thoughtful investment thesis can incorporate factors such as geographical area, industry, product type, SDE margin, operational model etc.

Keep in mind that flexibility is key throughout the search. Ask questions such as: “Am I willing to go smaller in size (or SDE margin) to find a business in the right industry?” or “Can I be more flexible on industry and location so that I can find a cleaner deal?"

Here are a few resources that can be particularly helpful:

Accounts: @guessworkinvest @SMBkapital @steveressler @girdley @RegZeller @joshuamschultz @SMB_Attorney @ClintFiore @sbabmarks @aebridgeman @SMB_Attorney @BrentBeshore

And these: twitter.com/i/lists/149184…

Publications: "Buy then Build", "Stanford Search Fund Study", "Messy Marketplace", "The Outsiders", "The HBS Guide"

Podcasts: Think Like an Owner, Acquisitions Anonymous, @PrivateMarket Insights, How I Built This, Built to Sell

Finally follow me here for additional threads like this - I'm building @PrivateMarket to support buyers through this process. Thanks y'all!