Entrepreneurship Through Acquisition (ETA), with Neil Pollard and Sean Kearns

In this episode, our host sits down with Sean Kearns and Neil Pollard, to discuss Entrepreneurship Through Acquisition (ETA)—a growing approach to business ownership. Together, we explore why ETA has gained momentum, how it lowers risks compared to startups, and what makes it a compelling choice for aspiring entrepreneurs.  

Listeners will learn about key steps to identifying, financing, and scaling an acquired business, as well as the critical role universities like the University of Denver play in fostering ETA education and ecosystems. Whether you’re curious about transitioning into business ownership or understanding new market opportunities, this episode provides actionable insights and ways to engage with ETA. 

Transcript:

Joshua Ross:

My name is Joshua Ross and welcome to the Entrepreneurship at DU podcast. Today I discuss entrepreneurship through acquisition with entrepreneurs Sean Kerns and Neil Pollard, both professors at

Neil:

The University of Denver. Not everyone can afford the time or the energy or the financial sacrifice really to do the two people in a garage with ramen noodles thing, entrepreneurship through

Joshua Ross:

Acquisition. It’s also called ETA. It allows entrepreneurs to bypass the high risk early stage challenges of building a business from scratch With ETA, the bonus is the entrepreneur inherits an existing customer base, revenue stream, a brand and operational infrastructure. But guess what? It’s not a passive investment. Don’t plan to buy the business, hand the keys to a manager and then go sit on a beach. Buying the business is just the start.

Sean:

You need to work on your credibility everywhere as it relates to ETA. Can you actually come up with the money to get the deal done? Can you run the company? Your employees are going to judge you every second until they really get comfortable with you.

Joshua Ross:

Here’s my conversation with Sean and Neil. Sean and Neil, welcome to the podcast. I’m really excited to have you in the studio to discuss entrepreneurship through acquisition. So we’re going to keep it simple to start and for the rest of the podcast so we don’t have to keep saying entrepreneurship through acquisition, we’ll just use the acronym ETA. And so the first thing I want to understand, and Neil I’d like to start with you, is understand what is ETA and how does it differ from simply buying a business? There’s a saying, you buy a company not a job. So how can entrepreneurs ensure they’re acquiring a scalable business rather than just create another job for themselves?

Neil:

Yeah, so I think it’s interesting. Entrepreneurship through acquisition is not necessarily a new concept. I mean, buying a business has been around for hundreds of years, but I think it’s the entrepreneurial aspect of it that is creating a bit of a shift. And so you could buy a business, you can buy a donut shop and run a donut shop, but entrepreneurship through acquisition has more of a growth orientation in that you may buy a donut shop with the intent that you’re going to scale it to be a more regional or national operation or something like that.

Joshua Ross:

So Sean, why has this become such a mainstream topic in recent years that we have books written about it, there’s university programming, there’s online courses you put in ETA, now a lot of different options pop up, but why now? What are the factors that are driving this increased interest?

Sean:

I think there’s a few things. Number one is the need. There’s a lot of people that own businesses that are ready to transition to retirement and they don’t have management succession. And traditionally businesses for sale are handicapped if there is no management team that comes along with them. So it’s a bit of a unique opportunity for someone to come in who wants to fill that chair and really create a market for that person who doesn’t have the succession. The other thing I think that’s a big deal is the understanding and the maturity of private equity markets and the financial mechanisms that become available. And so there’s now financing sources available that weren’t 20 years ago and make it easier. It’s not easy, but easier for someone to come in and buy a company and start their career that way.

Neil:

Yeah, I think that a lot of folks that would like to have their own business, I think often are scared away by startup entrepreneurship because not everyone can afford the time or the energy or the financial sacrifice really to do the two people in a garage with ramen noodles thing. And what’s nice about ETA is that quite often they’re acquiring a business that is a going concern, that has had some success, has a really solid foundation, but can bring that innovation and really take that company that might be 25 years old into the future, which I think is really exciting. Plus, as Sean just mentioned, depending on the source you’re looking at, there’s 10 trillion in business assets that are about to change hands or get liquidated in some way. So I think that that’s another sort of thing that’s bubbling up that is creating a renewed focus on buying a company.

Joshua Ross:

Yeah, I love the fact that here at the University of Denver entrepreneurship, atd, we focus with our students on creating something, creating something from nothing driving innovation, but there’s a lot of risk in that and most businesses fail over a certain period of time, but with entrepreneurship through acquisition, you have a customer base, you have cashflow, you have a brand that’s out in the market somewhere, you have product fit, so there’s risk in everything, but it seems like entrepreneurship through acquisition, it lowers that risk as it compared to starting something from scratch. So Neil, why is it important for universities like the University of Denver to engage with and prioritize ETA? You both have talked about why it’s important and why now, but in looking at it from the university perspective, research perspective, why is it important?

Neil:

I think there are a couple of reasons, and I think universities and colleges in their communities are sort of pillars and are responsible for educating the public. I think one of the biggest challenges with ETA is that I think people don’t really know where to start or how to do it, and there’s a lot of misinformation out there about what, so the merits and the challenges with actually buying a company. And so I think it’s incumbent on someone to educate, and I think that that’s one of the primary purposes of university. So I think that’s a big deal. Another big function of a university, especially an R one type research institution like the University of Denver, is to create new knowledge and to really understand a phenomenon that’s emerging. And ETA fits that bill really specifically in that it’s this old concept that’s reemerging in a very new way. And there’s, from a research perspective, I don’t think there’s a lot understood about ETA and there’s not very many academic researchers that are researching about it. And so we’re sort of in this really interesting little pocket of we have this community connection and we can educate the public but also can do really interesting and in in-depth research to truly understand what’s happening with ETA. So I think that the universities and specifically the University of Denver are really well positioned to explore this.

Sean:

I couldn’t agree more. And if you look at in each ETA opportunity, there is a buyer and a seller and both have big needs, big broad sets of needs that as far as I can tell, can’t be satisfied in one spot like they can be at a university. So sellers, I’m hypothetically 65 years old and I’ve been selling widgets for the last 20 years. I don’t know anything about selling my company. How can I help in a place where understanding everything I need to understand where there’s no service provider with an ulterior motive, investment bankers, CPAs usually are good, but they have one specific area of expertise and the seller needs way more. Similarly for the buyer, most of these folks, I was one of them, they’re young, they’re ambitious, ready to work hard, but they don’t have experience in lots of different areas and the university can bring the resources together to help them. Then ultimately a university can create an ecosystem, in my opinion, that serves both together so that you can collectively understand everyone’s needs and maybe there’s a match to be made by this buyer and this seller, maybe not, but the seller is going to learn more here than any other place that they have access to. And likewise, if you can create a pipeline of companies for buyers, man, what a service.

Joshua Ross:

I love that it’s a true opportunity for the University of Denver A to a trusted source in this area and also be a part of this ecosystem and become this really valued community member and someone that we can help our front range community build entrepreneurship through acquisition, help these individuals that are looking or groups that are looking to buy companies but also to sell. So are there certain types of businesses or industries that align well with the ETA model? And then on the flip side, are there industries or businesses that you would say avoid at all costs?

Neil:

So the way I think about industries that are ripe for acquisition, it’s not all that different than industries or types of businesses that are good to start from scratch. I think you want all the key parameters of any good business to be there, a large and growing market and interesting products and services that are of really high quality. And so the last company we bought was in the medical services industry. And so as we look at the medical world or the healthcare world, we have a huge population that is aging. And so there’s a lot of reasons to believe that there’s going to be a solid customer base there. I think in a lot of the reading that we’ve done around ETA, as we start to venture into this building a program here, a lot of the experts in the field are advocating for acquiring businesses that are not really that sexy, good, solid legacy type businesses that will always need to be around like a flooring and tile company. We’re always going to be building and remodeling homes. And so knowing that that’s there in sort of perpetuity, it creates interesting opportunities. I think

Joshua Ross:

Private equity is moving into rolling up a lot of these smaller businesses, these family run businesses and certain verticals. So if you were venturing into ETA and you see private equity in an area or an industry that you’re interested in, is that a signal to you to run the other way? They have much deeper pockets, they have more people, stronger resources, or does it provide a signal to say, you know what? This is actually a very attractive industry and we can get in at this point in time and there might be a more interesting pathway to sell over the next two to five years.

Sean:

So I think that I would never run the other way when smart people are focused on something that you like. With that said, you’re going to lose if every competition you have with in a bidding process for a company when your competition is private equity, you’ll lose. So I would not get into a bidding war. I would run the other way there, but private equity groups and investors, their biggest problem is deal flow. And so if you can find a company, and the key is get it under contract. So you go and meet with the sellers and negotiate a fair purchase price and depends on what the market says is fair in your particular industry, then you bring it to private equity if that’s the route you’re going to go. It could be a home run. It was for me and partially private equity folks are really smart and they can help you with your playbook, but they’re not operators either. And so they need an operator and if there’s multiple ways to do it without private equity, but if you bring private equity a deal, you often get paid more just for bringing the deal than you do. You get paid for all of the hard work in growing it, which isn’t anything that makes sense to me, but it’s true and people can take advantage of that.

Joshua Ross:

So Sean, for someone interested in entrepreneurship through acquisition, how do they begin the process of finding the right business? Can you walk me through this search process and the way they should think about approaching it?

Sean:

Yeah, so I’m going to draw on a very famous guy who started off in a bootstrap, he kind of way we’ve heard of him all here. His name is Phil Anschutz, and his advice was start. And so I love that advice because there is no playbook. It’s messy, but you’re going to have to be good at three things. One is finding deals, one is financing the deals and the third is growing it. And the biggest one in my opinion is the growing it. But that happens only after you buy something. I would start with your investment criteria. What are you looking to buy and why? The more you can narrow that down, the more refined you can get and people can help you. If you say, I just want to buy a company, man, I can’t help you. But if you say, I want to buy a company of this size in this industry with this focus, then I can help you where to go. So define your investment criteria. Number two is vet that, refine it, go out and talk to as many people as you can. Have them kick the tires on it. And I guarantee you the company you end up buying is going to ask you to change your investment criteria a little bit and rethink what you’ve done.

But having a roadmap to start with is absolutely critical. And then going out to talk to the capital partners that you’re going to need has to happen concurrently. And so talking to other investors, talking to investment bankers, talking to commercial bankers,

Neil:

I mean, I think a couple of things that are worth noting, and it kind of goes back to something we mentioned already, but there’s a band of types of companies that are worth looking at for ETA. And so companies that are too small is not necessarily good options. And then there are some companies that are really big where you may need a capital partner, a private equity partner or something like that. But within that band, I think you have to understand there are other financial options. I know we’re going to talk about financing deals here at some point, so SBA options and things like that, but even before searching for an opportunity. And there are a number of different websites and things like that that list businesses for sale and they’re of varying quality and the opportunities are of varying quality. But I think what’s really important is to do sort of an inventory of yourself even.

And so to understand the type of business or deal that you want to get into, but also to understand what skills and abilities you have. You may not have domain knowledge, you may not have run a donut shop or something before it, but you have something, some skill, some ability, some experience that you can leverage and then understand the type of business. Do you want it to be a retail operation? Do you want to manufacture things? Do you want it to be a service oriented operation? And kind of refine that a little bit because to your point, if you just say, I want to buy a company, well that’s hundreds or thousands of options. And so to refine that a little bit and really understand where you are uniquely qualified to do something, and it may be domain knowledge, but it may not be. And then go and search for those things. And sometimes searches take a long time. It could take a year or a couple of years to truly find the right deal.

Joshua Ross:

Well, you bring up an interesting point about skillset, right? Because you are buying a small business and most of these small businesses are focused on a certain industry and solving a certain problem. So let’s take an HVAC company, you see an opportunity to purchase an HVAC company. How should you look at that in terms of do I need the skills to actually be able to go and work on heating units and air conditioning units, or is it more important that I have operational skills to really go in and grow the business? But the question then is, if I just have the operational skills and I buy that business and day two half of my tech leave, do I need to be able to roll up my sleeves and actually go do the work?

Sean:

So I think it’s a great question and everyone loves to key in on the industry. You have industry experience. It was never important to me to go look for that for an industry. In fact, I didn’t have any industry experience. I was an investment banker in New York where I think it’s critical along the lines of what Neil is talking about of the self-inventory is can you make decisions? Can you make smart decisions that benefit the company? And sometimes you’re going to be sweating when you do ’em. Maybe your biggest customer says, I need a 20% discount or I’m leaving. Or your best employee says, I’m out. What are you going to do? And if you have the temperament for that type of environment, then you’re probably well suited to ETA, the business that I or the number one investment criteria was buying, right? And so for example, in 2019, I came up for Rare again, wanted to buy another one, and I started looking for where are their companies attractive companies for sale that I won’t have a lot of competition.

I started to think about venture capitalists that they make 10 bets and they need two or three to hit in order for them to be successful. Well, that means seven of their very smart bets didn’t work out for whatever reason, and nobody wants those things. So there’s plenty of really cool companies out there that are just kind of getting kicked to the sidelines. And I went into it, found one, and my second investment criteria was I need to understand it. And if I could understand it and the customer said it was valuable, it was interesting for me.

Neil:

If you purchase a company and you personally don’t have the domain knowledge, then we have to have someone who does. And whether that’s a partner or a co acquisition or if it’s a key employee or something like that. But I think also there’s a gap that you have when you purchase a company and you have to at least develop enough domain knowledge yourself to have interesting and meaningful conversations with the people in the company who do have the domain knowledge. So my father owns and runs a machine shop now, and he’s kind of always said, I don’t need to be the best machinist in order to own a machine shop. I just need to have the best machinists. And so that goes to leadership and motivation and a lot of those sorts of things. Compensation even sometimes where you have to have the right strategy I think, but I don’t know that somebody will be hyper successful buying a company and then not developing the domain knowledge. I’m sure you’ve learned a tile about every time tile and flooring, but not knowing at day one I don’t think is going to inhibit success. But you have to fill the gap pretty quickly.

Sean:

I will say as an add-on to that, your capital partners, unless they’re very wealthy, great Aunt Rose, are going to ask you about your domain knowledge and why they should put their capital on the line for you. So you can’t dismiss it. In fact, I would say more broadly, you need to work on your credibility everywhere as it relates to ETA. Can you actually come up with the money to get the deal done? Can you run the company? Your employees are going to judge you every second until they really get comfortable with you. Same thing with your customers. Who’s this new guy and can I continue to rely on this company in order to be successful? So start with your credibility and really work hard to make everyone comfortable with what you’re doing,

Neil:

Whether you’re starting a business or you’re buying a company. I’ll always want entrepreneurs to think about these three things. And so any company you start or buy, you should be able to show investment partners or other stakeholders that this is the right time to start this business and you have objective proof of that this is the right problem to solve, but also that you’re the right person or team to do this. And to your question, Joshua, if you’re not the right person to do this day one, then how are we going to pretty quickly become the right person to do this? And some of that is just learning everything you can about the industry.

Joshua Ross:

So you found the perfect business and then you have to figure out how to value it. The seller has a value that they put up and then you’re like, this is what I want for it. But it comes a little bit like buying a house, right? A homeowner feels has a lot of blood, sweat and tears put into their house. They have a lot of memories, so they may have value it a little higher than the market, and that’s the same with businesses. And so when you look at that business that you potentially are going to buy, what are some of the ways that to look at valuing it?

Neil:

Yeah, so I think the simplest way is that multiple of cashflow or profitability or something, and there’s a range. So you might be somewhere between two and five times some financial metric, and that’s great. And then there are certain other more intangibles that can either amplify or erode what that valuation is. And so I think that there’s a lot of different factors that go into it. If you have established customers with signed contracts that guarantee revenue into the future, then that can sort of ratchet the price up a little bit because there’s some security and safety in that for the buyer. And then if there’s other liabilities or the building needs work or the reputation, the community is not great and the buyer has to overcome those things, that starts to detract from it a little bit. But certainly any experience I’ve had with a seller, they remember the missed birthdays and the blood and the sweat and the tears and the pain and suffering that went into it, and this is the thing that they’ve been working on for most of their life in some cases.

And so I think quite often it’s hard for sellers to understand that buyers can’t necessarily pay for that, at least not all of it. And it’s hard for buyers to appreciate that somebody’s life’s work is about to change hands. And so one of the things that we know and we’re starting to understand about business sales is that it’s a much more emotional process than just an asset sale. There’s a lot that goes into it, and that’s some of the emerging research that is exciting that I’m excited to do around ETA is to find out what are some of the other challenges and limitations. But

Sean:

Yeah, I think valuations is critical and it’s some science and some aren’t, and you got to kind of wade through it all so often. There are comps in the industry or your banker can help you look at what those are. There’s sometimes I backed into it accidentally, but I got some experience as a turnaround guy, and so a couple of the companies I’ve bought had no cashflow. And so multiple cashflow is simple, but we didn’t have any. And so I would say in part, you need to pay attention to a few different things. Number one is how much competition do you have as a buyer? And I particularly like places where I don’t have competition. The value goes down and you have to be patient. As Neil mentioned, it can take a long time. If you make an offer and they don’t like it, then you say, okay, I understand and you should go out and find what you need, but this is what I can come up with.

And it’s happened a few different times to me. They whine and cry and hem and haw, and then they come back and do my deal. So lack of competition is a big deal. I would also say that you got to figure out what value you’re going to create with this business and does the price that you’re going to pay support the value you can create. And always, I say undercut it, undercut, do sensitivity analysis on what you think you can actually do to create value in this company. And then imagine your purchase price is going up. Because the way I think about purchase price isn’t just what you give the seller, it’s what you need to start. So if you need not only to pay the seller something, but to re-fit your machine shop with new tools because they’re all worn out, then that’s part of the purchase price. So really understanding everything that you need and handicapping it. If the number’s still pencil, then you should probably move forward. Last comment on this, as long as you’re gracious and nice about things, don’t be shy about putting in a low offer. You can come up, but the price you pay as Warren Buffet says you make money or lose money the day you buy the stock.

Joshua Ross:

That’s great advice. All right. So as you’re thinking about the valuation and you found that business that’s pretty attractive. Sometimes you have the money in the bank and you can make an all cash offer, which I doubt many people would advise on doing that. But what are some other options? What are some financing options to actually to purchase a business?

Sean:

So the classic ones, you need two kinds of capital debt and equity. And if you create a list within both categories, there’s some classic ones, and then I would encourage some creative options too. But on the equity side, everyone’s going to look for you to put your money in, and it’s critical. If you don’t have money, then they’re going to look for friends and family to put their money in. I would encourage people to think about on the equity and the debt side, the seller as a potential source of capital, because if they’re motivated to sell, then maybe they’re motivated to help you out. It’s a double-edged sword because they’re going to have all the opinions and the loyalty of customers and employees, so you need to make sure that you box their input. But they can make things very easy from a financing perspective, debt, and there’s a couple different kinds of debt, the SBA, and then traditional debt.

You got to really think hard about personal guarantees, which usually come with both of those. And then I really encourage people to think about creative options. When I started thinking about this in 1998, I guess when I was in business school, there was a woman who came through just a couple of years before me. She bought a company, her name is Ashley Kornblatt. Her company is called Western Spirit Cycling. I’ve never met her, but she, as I understand it, bought this company by selling to potential customers. Something like 20, you put in $25,000 effectively prepaying for trips that you want to take. And it’s not refundable. You don’t get ownership, but you get five bike trips or something like that. And she killed it. And wow. So don’t underestimate the creative option when people are motivated. Usually there’s something there.

Neil:

Yeah, yeah, I would think all those financing options are there. I think some context. One of the companies that we bought, we structured the deal in a way that the better the company did in the years after acquisition, the better the seller did because they carried some of the note and that motivated the seller to continue to support and transition and had a vested interest in the success of the business going forward. It provided some security for us. And also, so the company that we ended up owning a hundred percent of after a couple of years was in a much better position, and the seller was in a much better position. So to that creative point, I think it can be a win-win for everybody. It doesn’t always have to be, I’m going to go in as the buyer with the lowest possible price I know the seller wants to sell.

I think there can be a benefit for both if we can structure it in a really interesting way. But I think one other note about purchase, a potential buyer may see the asking price for a business of a million dollars and even if it’s worth a million dollars. And I think a lot of folks will get scared off by, well, I don’t have a million dollars to start. Well, you don’t really have to necessarily. I think there are different lending options, and it’s probably outside the purview of the time we have together here today, but there are options where you can acquire something for a portion of the original asking price and use the cashflow of the company if there is some cashflow to service the debt, but also pay yourself as the owner and the entrepreneur. And so I don’t want people to be scared away from the idea of buying a company because of the original outlay of cash.

I think one of the other interesting things to think about that I think a lot of people probably don’t is that the day you acquire the company and the bank accounts transfer and all the vendor accounts transfer and everything, you’ve got a couple of weeks and now you have your first payroll due and all of a sudden rent becomes due pretty quickly. And so purchasing the business is one thing, but having enough cash, liquid cash in reserve to be able to run the business until you start to generate measurable revenue is something that I would suggest people overlook and they can’t just can’t afford to.

Joshua Ross:

Well, it’s a great, right, you get the keys to the business in two weeks, you have payroll and you probably have benefits and potentially inventory and rent. And if you’re selling a product, you probably have terms with your customers, net 30, net 45, net 60, so that money’s not rolling in for a certain amount of time, and you really got to figure out how to bridge that gap. Alright, so final question I want to hear from both you we’re going to start with Neil and then we’re going to follow up with Sean. If you were to acquire a business today, what type of business would you buy and why?

Neil:

It’s hard because I think you got to look at what businesses are available or what deals you can find. But I think about myself and what I want to be doing every day. And I tell people all the time that I am most on fire when I’m creating or building or making something. And if I’m going to buy a company, I want to do something that I love and that I care about doing, and that’s a bit of a luxury. But I would start to look for opportunities to be able to do something tangible. But back to Sean’s point earlier, you got to figure out what do you want out of this and what type of deal do you want? And I don’t think I would be fulfilled in having a service-based business or something like that. I think they’re hyper valuable. But for me, I would want to build something or make something or have something tangible that I can hand to someone and have them see this sort of delight on their face or solve the problem in a tangible way.

But that’s me today. I mean, next week it could be something different. But I think that the big thing is, is there reason to believe? Have you done the research and have you thought about whether or not there’s a reason to believe this company can grow, right? Has the ability to grow from where it is now. And so all the big fundamental aspects, what are the margins of the product look like, and is it a big growing market and is it a need versus a want? And a lot of those things I try and strip the emotion out of it and the excitement around having your own company, but look at the real logistics of it and go, can this be a more interesting business than it is today? If I can’t add value to it, then there’s no reason to buy it. So that’s a long answer to say, I don’t know today.

Sean:

I mean, I think the beauty of ETA, the very best thing about ETA is that you get to control your own destiny and you’re the ball’s in your hands. And so you get to make it or break it all on your own. And I would lean into that. It’s a little bit like what Neil was saying, what lights your fire, and if it lights your fire, you’re going to be good at it and you’ll learn things. And so I actually have one under contract right now that I’m looking to buy. I can’t say much about it because of confidentiality reasons, but it’s in the pet services industry. It’s more of a fit for me now than it would’ve been 20 years ago. In fact, I’ll tell you, I went and did this, what I call VC cast off model. I referenced a little bit ago, if I was 35, I would do that all day long because there is huge money to be made, but they require a whole heck of a lot of work. And I don’t have that risk tolerance. Tolerance or gas in the tank right now that I’m 54. So in the pet services industry, we’ll be if we can get it over the finish line, a rollup. But the cool thing is that we’ve had successes before. And so this is the first one that my wife and I are doing on our own, and we won’t have a private equity partner.

Joshua Ross:

Well, Sean Neil,

Sean:

Thank

Joshua Ross:

You for your time today, making me a little bit smarter. Thank you. The entrepreneurship at DU podcast was recorded in Marjorie Reed Hall on the University of Denver campus. You can find us on Instagram at du Entrepreneur on Twitter, X at DU entrepreneur, and on Facebook at entrepreneurship at du. This episode was engineered, edited, and produced by Sophia Holt. Entrepreneurship at DU is part of the Daniels College of Business, which has its own podcast. Check out Voices of Experience wherever you get your podcasts.