HBR Guide to Buying a Small Business

Ruback and Yudkoff teach the entrepreneurship through acquisition course at Harvard Business School and wrote this as the practical manual for buying a small business and running it.

The argument for the path is that acquiring an existing profitable business is a lower-risk route to owning and running a company than founding one, because the customers, revenue, employees and operations already exist. They target businesses with revenue in the low millions and earnings between about three quarters of a million and two million dollars, which is large enough to support an owner-operator and small enough to be beyond the attention of private equity funds.

The practical content is specific. On what to buy, they set out criteria: enduring profitability demonstrated over years, a business the buyer can actually run, recurring revenue or repeat customers rather than project work, a fragmented customer base rather than concentration, and a business not dependent on the departing owner's personal relationships. On the search, they cover the self-funded search where the buyer works alone and the funded search where investors pay a salary during the search in exchange for the right to invest in the eventual acquisition, and they set out the economics of each.

On the transaction, they cover approaching owners, the letter of intent, valuation using multiples of earnings, diligence including quality of earnings analysis and customer interviews, deal structure using seller notes and earnouts, and financing including guaranteed small business lending.

On the transition, they cover the first months, the communication with employees and customers, and the changes that should and should not be made early.

The book is written for the American market and depends on financing structures specific to it. It is practical rather than analytical, and the base rates of success in this path are not presented, which readers should note.