More people are becoming entrepreneurs through acquisition: How banks are financing these SMB acquisitions
- Entrepreneurship through Acquisition is a new trend that is becoming more and 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.
- Together ETA through SBA has impacts not only SMBs by allowing firms with older owners to find new leadership but also on America at large.
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:
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