Entrepreneurship M & A

What are the different types of entrepreneurship?

I get asked quite a lot about, how do you become an entrepreneur? Are you born an entrepreneur? Is it something that you can develop over time? What actually is it?

It's a term that gets used a lot, there's a bit of vanity around it sometimes, it's very popular, dare I say a little bit sexy to be an entrepreneur, but what does it really mean? And you know what, I'm not going to get into sort of textbook definitions, I'm going to give you my thoughts on this.

I class myself as an entrepreneur, I wouldn't necessarily say I've always been entrepreneurial in every stage of my career. I started a business when I was 18, I sold it when I was 21, I then spent the next 15, 20 years as an employee in the world of corporate, before sort of coming back to be more entrepreneurial later in life. And I think, sometimes these labels that get put on things put pressure on situations and you've just got to make choices that are right for you at any given time.

But a lot of people think of entrepreneurship in terms of starting a business and that's not 100% true. You know, you can be entrepreneurial within a business, you can be an employee, it's called an entrepreneur and you can and make very good businesses within other businesses and you can benefit handsomely from that.

But you can also buy businesses, you can buy established businesses and become an entrepreneur that way, becoming a business owner is maybe the better definition. Right now, when people come to me and say they want to be more entrepreneurial, they might be sitting at home on zoom and they don't ever want to go back into an office, they never want to go back and work for someone ever again and they're saying, “listen, I want to start a business, I want to start a business” and I'll go “well, if I were you, knowing what I know and the conversations that I have and the various insights that I I've gained over the last few years talking to amazing people on Scale Up Your Business and all that, is that right now buying a business and becoming a business owner is where I would put my focus.” It is by far and away, the best time in recent memory for doing this and there are a lot of dynamics that are coming together.

I just wanna unpack that a little bit today, because I think if you are reading this if you listen to Scale Up Your Business and you're thinking, “Hey, this is the year that I'm going to do something about my intent, my ambition, to be more entrepreneurial”, then this is where I would start. 

The first thing to say is there are so many small businesses out there that have been around for some time, good profitable businesses, where the owners of those businesses, for whatever reason, just don't want to be there anymore. They might've done their time, they might've made their money, COVID may have affected them in certain ways, they may have ill health, it could be all sorts of things going on, but they're at a certain stage where they want to retire, they want to sit on a beach, they want to do something else and they've got a great business.

There are three ways you can sell a business, you can sell it to another person, you can sell it to another business, or you can sell it to private equity. The shame, if you like, or the tragedy around small businesses is there's a lot of them that don't sell. I forget the exact figure, but it's something like 10% of them actually sell when they're below a certain threshold and that threshold could still be a business that's really viable for you to want to own.

Let's say a business is doing say between 1 to 5 million in revenue, it could be making half a million in profit or more, you owning that business, you going in there and growing it and scaling it, you could get the profit up to, let's say a million pounds or dollars. That's an amazing income, lots of people, even in top-level corporate jobs would never, ever get that opportunity, that sort of money is reserved for some of the top CEOs of some of the biggest companies in the world. Just stepping back a little bit and looking at the opportunity for what it is, if wealth creation is in your frame if it's something that you want to do then actually going to this business ownership sphere could be the vehicle to do that.

The other question people come up with when I talk about this, they say, 'well yeah, surely you've got to have a lot of money to buy a business' and again, that's not true. Now you do need to have some money, a lot of people go out there and say you can buy a business for no money down and I have had the experience of doing that once out of the various companies that we have, but it's rare.

But it is possible to buy a business for very little of your own money and it's what we call a leveraged buyout and that's where you'll have a different mechanism for acquiring a business off someone, which means you're leveraging various components of the business and other financial measures and tactics to be able to acquire.

Just to unpack that a little bit here, just to give you a little bit of insight as to how that works is, first and foremost, if you go and buy a business which is profitable, it's got some good assets, using what we call a leveraged buyout (LBO), you can actually get asset finance against those assets.

What that effectively means is you can take a loan out, sometimes that loan is 10 years or more, you've got interested against it, but it's not much and that effectively gives you a sum of money to put towards the price of that business, so that's the first thing. Whenever I acquire a business myself, I look for asset-rich businesses.

The second thing, and a lot of the people that you're going to be buying these businesses from, as I said, they've made some money, the most important thing is protecting their legacy going forward. What they're really interested in is the safe pair of hands that you can provide. So you can often negotiate with those sellers what we call seller financing and what that effectively means is that you agree a sum of money that you're going to pay back in the future, over time, from the profits of the business that you're acquiring. It’s a little bit like having a mortgage on a house actually, you don't own the house, usually from the outset and you pay it off over time, but you get the benefit of the house.

It's a very same thing in a business, you own the business, but you are paying back the original owner, the seller, over time from the profit. If you think of it this way, let's say you've taken some asset finance and you've got a lump sum of money, then you agree maybe three to four years of paying back the rest. You can actually acquire that business for a few thousand pounds or dollars in terms of the fees to set it up, so any accountancy or legal fees, any due diligence, but it's a fraction of what the business is valued. And without getting into the detail I need to get a sort of whiteboard up and draw it up. You can get that loan and pay it back over 10 years, you can then pay the seller back through the seller financing. There's usually still a lot of money left in the profitability of the business before you scale it up, that becomes your dividend, becomes your income. Depending on the size of the business you buy, that can be a substantial amount of money. I just want to kind of impress on you that as an option. 

Startup is one way and it's right for some people, but it's not right for everyone, acquiring a business, particularly if you've already been an employee, a senior level employee, you know how to run a business, going into business ownership might be the pathway for you and as I said now is the best time to be looking at that as an opportunity.

I hope this is useful for you, always reach out if you've got any questions about this, I've got multiple podcast episodes about buying, selling businesses, mergers and acquisitions,10 years in private equity. I've done so many different deals and it's something I love to talk about and always happy to help. But as I said now is the time to really take action because the opportunity that's presented itself at this stage is absolutely superb.

Nick Bradley

Scale Up Your Business

www.suyb.global