More people are becoming entrepreneurs through acquisition: How banks are financing these SMB acquisitions

Some people become entrepreneurs by building businesses from the ground up, and others become entrepreneurs through acquisition. This second path to business ownership is called “Entrepreneurship through Acquisition” (ETA). 

This approach allows entrepreneurs to skip the teething troubles and fast forward to leading a business that is already road-tested. 

“ETA offers several advantages, such as acquiring an established customer base, existing cash flow, and proven business models. It is particularly appealing to aspiring entrepreneurs looking to mitigate the risks associated with starting a new business,” says Arthur Birenbaum, Head of SBA Lending at Grasshopper Bank. 

Over the last few years, ETA has become even more popular with the help of the Small Business Administration (SBA) 7(a) loan program which allows aspiring entrepreneurs to acquire companies by borrowing money on advantageous terms compared to a private capital loan. 

SBA loans are particularly popular for this type of entrepreneurship because they offer lower interest rates, longer repayment terms, more applicable uses, and broader qualification criteria, said Birenbaum.

Exploring the ETA through SBA lending trend

Last year, SBA 7(a) lenders approved more than 57,362 loans, amounting to a total of $27.5 billion in small business loans, according to data. This is an increase of almost 10,000 loans from 2022, when 47,678 loans were approved. 

Interest in ETA is increasing recently and scholars on the subject aren’t sure exactly what has catalyzed ETA activity but they have it narrowed it down to a few factors:

“It might be a combination of more businesses without succession (aging population), more capital available for alternative investments, the existence of better trained and more sophisticated entrepreneurs, and the exhaustion of the risky startup fever or the abundance of more sophisticated M&A service providers, like lawyers, accountants, and brokers. More research is needed to unveil these reasons properly,” said Newton M. Campos, Professor of Entrepreneurship, at IE University in Brazil.

While Campos’ remarks are directed at the rise of Search Funds after 2010s – a type of investment vehicle that makes ETA possible – they can be extrapolated to explain the general rise in ETA. as well.

Birenbaum lists similar causes for the trend:

“There are many attributes of the current socio-economic climate that are encouraging ETAs rather than building startups from scratch.  Such as easing economic uncertainty with proven concepts, more purchase options with the aging business owners and the “silver Tsunami”, more access to capital options, operational and employee infrastructures in place,” he said. 

The rise of ETA may be seen as a result of the maturation of certain systems and the betterment of others.

On the ground, one catalyst is the government, which is incentivizing ETA through SBA lending.

“SBA loans are partially guaranteed by the government, which reduces the risk for lenders and can make them more willing to extend credit to small businesses,” he added. This reduction in risk is an important motivating factor for lenders in difficult credit markets, according to Birenbaum. 

88.5% of SBA loans were approved by banks in the fiscal year 2024, according to the SBA. This large share makes them an important in the ETA through SBA trend.

How ETA affects SMBs and America at large

The success of an acquisition largely depends on how a transition is managed and how the new leadership affects the existing business model, according to Birenbaum.

If done well, the acquisition can help the business improve its financial health, operations, and employee benefits. But if it goes wrong, the business runs a risk of failure and may now also have an additional burden of debt. 

Beyond any individual SMB, increased ETA activity has a part to play in society, as well. Making owning businesses easier, also eases the process for those groups that have found it difficult to be entrepreneurs due to systemic biases. “Equitable lending can enhance ETA by ensuring diverse entrepreneurs have access to capital needed to acquire existing businesses,” says Birenbaum.

While equitable lending is a step towards ensuring that the next generation of SMB owners is diverse, numbers today paint a different picture. For example, although women owned businesses account for nearly 40% of all businesses in America, women owned businesses only accounted for 30.7% of all SBA loan approvals last year. Similarly, black-owned businesses account for 13% of the nation’s businesses but have received only 7.2% of the SBA loan approvals.

To make sure SBA loans positively impact everyone, SBA lenders can ensure risk assessment and approval procedures don’t hinder diversity. “Challenges related to implementation, risk management, and perceptions of fairness must be addressed to ensure the success and sustainability of equitable lending initiatives,” he said. 

As America heads towards an election, SBA lending and ETA may also be affected, depending on how the new administration views SMBs and what importance it assigns to equitable lending and diversity. 

“Enhanced funding, targeted support for underserved communities, favorable regulatory adjustments, and economic stimulus measures can positively influence SBA lending.  Conversely, budget cuts, reduced regulatory oversight, and economic uncertainty could pose challenges for SMBs seeking debt,” Birenbaum said.

These policies will determine what the new face of SMB leadership looks like and whether banks will determine what the new face of SMB leadership looks like and whether banks will play the role of the enabler or the restrictor in building that future. 

Sidebar: Underwriting SMBs

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