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Buy Then Build

Buy Then Build

Walker Deibel
2018
T3 310 pages · about 5h 10m to read Open Librarygoodreads

Acquisition entrepreneurship as an alternative to founding.

Summary

Deibel, who has acquired several small companies, argues that buying an existing business is a better route to entrepreneurship than starting one, and sets out how to do it.

The argument rests on risk and time. A startup must find a product, find customers, build operations and reach profitability, and most fail at one of these. An existing profitable business has already done all of it, so the acquirer begins with revenue, customers, employees and cash flow, and can direct effort at improvement and growth rather than at survival. He calls this acquisition entrepreneurship and distinguishes it from both venture-backed startup and from passive investment, since the buyer intends to operate.

The practical content covers the process. Deibel explains the market for small businesses, which is dominated by retiring owners with no succession plan, and argues that the demographic wave of these owners creates persistent supply. He covers deal sourcing through brokers and direct approach, the assessment of what makes a business acquirable, particularly the degree to which it depends on the owner personally, which is the single most important variable. He covers valuation using multiples of seller's discretionary earnings, the structuring of a transaction using Small Business Administration lending in the United States, seller notes and earnouts, and the diligence process including quality of earnings, customer concentration and the reasons the seller is selling.

He is direct about the constraints: the buyer must be able to run the business, the financing structure requires personal guarantees, and the transition period after closing determines whether customers and employees stay.

The book is oriented entirely to the United States, and the Small Business Administration financing structure it depends on does not exist elsewhere. It is practical rather than analytical, and Deibel's own record is the evidence.

Key takeaways 7

  1. An existing profitable business has already solved product, customer and operational problems that most startups fail on.
  2. Retiring owners without succession plans create a persistent supply of acquirable small businesses.
  3. The degree to which a business depends on the owner personally is the most important variable in whether it can be acquired successfully.
  4. Small businesses are valued on multiples of seller's discretionary earnings rather than on the metrics used for larger companies.
  5. Government-guaranteed lending in the United States permits acquisitions with small equity contributions and personal guarantees.
  6. Customer concentration determines how much of the business survives the ownership transition.
  7. Understanding why the seller is selling is a diligence item rather than a courtesy, because the answer frequently explains the price.

Who should read it

Prospective owner-operators considering acquisition rather than startup, particularly in the United States where the financing structures described apply.

Similar books 6

Chosen by shared topics, the entries that hold them, and the people who recommended both.

Richard S. Ruback, Royce Yudkoff · 2017

How to search for, buy and run a small business as its owner-manager.

Sam Wyly · 2008

Entrepreneur's memoir of building and selling successive companies

Recommended by: Mohnish Pabrai

Robert F. Bruner · 2005

Why mergers fail; the break risk an arbitrageur underwrites.

Scott Davis, Carter Copeland, Rob Wertheimer · 2020

Sell-side analysts comparing Boeing, GE, Honeywell and Danaher.

Recommended by: Patrick O'Shaughnessy

David Harding, Sam Rovit · 2004

Bain's evidence that frequent small deals beat occasional large ones.

Where it sits in the reference 1

Investment styles

Topics

Entrepreneurship and StartupsSmall Business and Bootstrapping