A review of “Buying Your Way into Entrepreneurship” by Richard S. Ruback and Royce Yudkoff
By Kevin Howard
Starting a private practice is a massive endeavor that requires significant time and money.
Richard S. Ruback and Royce Yudkoff, writing for Harvard Business Review, say that there is a second route to break into business ownership: acquisition entrepreneurship. By purchasing and running an existing operation, the new owner will have a practice full of clients, marketing operations, staff, and more.
But acquisition entrepreneurship does have its own unique challenges. In “Buying Your Way into Entrepreneurship,” the authors dissect why an individual should purchase a small business, how to find the right business, and how to lead a newly acquired business.
WHAT IT TAKES TO BUY A BUSINESS
To succeed at acquisition entrepreneurship, according to the authors, a potential owner needs to have basic management skills, knowledge of finance, experience leading and managing others, and the ability to make decisions, in addition to other skills. Remember, acquiring a private practice means you are immediately in charge, so having these skills will be invaluable when you have staff and clients to manage.
For this type of entrepreneurship, potential owners need to have confidence and need to be persuasive. They need to be able to walk into a room with people they do not know (like business brokers, investors, sellers, and the clients and employees that they inherit) and project optimism to show them that they can lead the business to new heights. For some, this may be a natural role while others may need time to practice exuding the confidence required for acquisition entrepreneurship.
Persistence is also needed in the purchasing process as well as leading a business. When pursuing the purchase of a business, you might find the perfect fit, reach an agreement with the owner, and work on a deal for months only for the deal to fall apart at the last minute. Persistence will help you not only keep going through the months-long process of vetting and, hopefully, buying a business, it will help you bounce back when a deal inevitably falls apart and move on to the next one.
The Ability to Learn
Additionally, potential owners should be enthusiastic learners. When you find a private practice and purchase it, you must be able to understand all aspects of what happens in the business. How does the client payment system work? What are the protocols for following up with clients when they miss a payment or when they try to set up an appointment? What does the private practice’s marketing strategy look like? These are just some of the considerations a new owner must quickly become adept at when they acquire a business.
BEFORE YOU BUY
Take some time to reflect on the trade-offs that entrepreneurs make when going on their own. The article asks: “Do you value what you’ll gain more than what you’ll lose?”
While you will be able to make unilateral decisions, being at the helm of the business comes with more pressure. You will also be giving up the comfort working in a more structured and larger organization with support from peers, managers, and functional groups like human resources. Your pay may be connected directly to your and the business’s performance, while any mistake that is made will hit you harder than if you were a lone employee in a corporate machine. After some deep considerations, if you think you are up to the task, you are now ready to begin your search to purchase a private practice.
SEARCHING FOR THE RIGHT BUSINESS
Locating the right private practice will take time. According to the authors, you or your business partner(s) need to commit to searching full-time for six months to two years. This may seem extreme, but this extended time period will help raise funds from investors, identify potential acquisition prospects, vet the best of the lot, negotiate, and eventually find the right practice that will sell at a reasonable price.
The authors suggest creating a search fund to raise capital for your cost of living and out-of-pocket expenses during your search. This involves approaching potential backers (i.e., wealthy individuals in your network or people in the small-business-acquisition community) and offer them a first look at investing in a business at favorable terms. This is a good way to not only acquire the money you need but to find advisors who can help you through a deal process, especially if you have never bought a small business before.
Prospects may be searched every day through referrals from a buyer’s network, brokers, or direct outreach. This could accumulate to thousands of prospects over a year or two, so the authors recommend potential buyers consider the following criteria to vet potential businesses:
- Is it profitable?
- Is it an established business?
- Are its revenues and cash flows in the desired range?
- Do you have the skills to manage it?
- Does it suit your lifestyle (location, hours, need for travel, and so on)?
FROM BUYER TO LEADER
Once you have closed the sale (which is an extensive process not covered in this Resource Review), the authors advise the new owner to: meet all of the managers and employees, meet with external stakeholders, clearly communicate the transition plan to everyone in the business, and take over the business’s cash flow. The most common trouble for newly acquired small business is cash flow problems, according to the authors. New owners should create an approval process where they personally approve all payments before they go out and review the accounts-receivable balance at least weekly.
Exploring acquisition entrepreneurship can be a long process that tests everything from financial acumen to leadership abilities, but it offers a strong opportunity for business-minded entrepreneurs to get started with something that’s already in motion. Entrepreneurs who are anxious to get started may find that an acquisition is the perfect fit for their business aspirations.
Kevin Howard is a staff writer for PPS based in Mount Laurel, New Jersey. He may be reached at email@example.com.