Four Common Pitfalls I've Seen Across Hundreds of ETA Deals

This Week in ETA:

• Searchers: I co-authored an article with Sam Rosati for The Playbook by SMBootcamp on four common pitfalls we’ve seen across hundreds of ETA deals. Self-funded SBA acquisitions don’t follow a neat power law like VC or a bell curve like PE— we argue that you generally end up in one of two camps: treading water or building a compounding growth machine. We call out 1/ Customer concentration, 2/ CapEx & working capital intensity, 3/ Cyclicality of the business, and 4/ History of profitability. Understanding these four factors can make the difference between simply surviving your SBA loan term and building a business that compounds value for years to come.

• Investors: Using a private-equity style, IRR-obsessed approach to running your acquisition is unwise. Instead, successful searchers play the long-game, and positive results for investors follow. This recent article from Yale School of Management highlights how adopting a perpetuity mindset (and borrowing lessons from “family businesses”) shifts focus from maximizing short-term IRR to building durable cash flows, strengthening culture, and avoiding risky over-leverage. I believe this approach actually yields steadier returns and companies that drive strong exit multiples.

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Plus:

• I have sung the praises of Entrepreneurial Operating System for my own businesses (and recommend it to our searchers)! This Searchfunder thread has good insights on other operating frameworks and “first 30 days” activities not to be missed.

• Don’t underestimate the intelligence of your seller - both in how they structure the deal, and in how they were running the business before you acquired it. There may be quick wins through modernization, or it may take some additional work to uncover where the growth areas are.

Question:

Hit reply and tell us - What do you think of the common pitfalls that Sam and I chose? Any others that you’d add to the list?