Skip the Startup: Why More Entrepreneurs are Choosing Acquisition

What if you could become a CEO right out of business school — without starting your own company or spending decades climbing the corporate ladder?

A growing number of MBA graduates are doing just that by pursuing Entrepreneurship Through Acquisition (ETA), a strategy that lets them fast-track their way to the top by buying and running small businesses.

Les Alexander, the John Glynn Endowed Professor and a professor of practice at the University of Virginia's Darden School of Business, has seen this surge firsthand. “Three years ago, I might have had only a few alumni reach out about ETA,” he says. “This year, more than 15 alumni have contacted me in some way, asking how to pursue this path.”

The 2024 Stanford Search Fund Study backs this up. Last year, a record 94 new search funds — investment vehicles that help entrepreneurs acquire businesses — launched. Over the past decade, the number of new funds has more than doubled.

What's Driving the Boom?

It’s easy to see why ETA is appealing: By acquiring established companies, graduates can step directly into the top executive role, often becoming CEO shortly after completing their MBA.

“It’s a chance to develop a strategy, create a culture, and put many of the tools you learn while at Darden to work,” says Alexander. “You can build a business, as opposed to helping other people do that in their business. And you can create personal wealth.”

He points to a number of factors driving the pick-up in interest: increased awareness about ETA as a career path, more classes offered at business schools, more avenues for funding, and a significant market opportunity created by baby boomers looking to sell their companies and achieve liquidity — often referred to as the “Silver Tsunami” of retiring business owners.

The numbers are staggering. More than half of U.S. business owners were age 55 and over according to the Census Bureau’s 2019 Annual Business Survey. As the last of the Baby Boomers approach retirement age by 2030, it’s clear that a big shift in small business ownership looms on the horizon.

According to a recent report from the Exit Planning Institute, 73% of business owners expect to exit their companies in the next 10 years, accounting for a $14 trillion opportunity.

Another factor that bodes well for ETA: The Federal Reserve recently lowered interest rates by half a percentage point and has forecast two more quarter-point rate cuts this year. Lower interest rates make it cheaper for entrepreneurs to borrow money and result in lower interest payments over the life of a loan.

What Makes a Good ETA Target?

Alexander says ideal ETA targets are profitable businesses that have been around for many years with EBITDA (earnings before interest, taxes, depreciation, and amortization) between $1 million and $5 million.

While there isn’t comprehensive data on private companies’ EBITDA, the target universe is estimated to be in the hundreds of thousands of firms.

Still, it takes a certain type of person to want to jump in and run a company. “You have to have that entrepreneurial spirit to really want to lead a small business,” says Alexander. “It's very different than running a large business, where you have lots of resources and lots of people.”

The best businesses for ETA, he adds, are those with recurring revenue, for example through subscriptions, or return customers. “It's much harder to break a business like that than it is a business that has very project-oriented revenue, where you have to continuously replace your customers all the time,” says Alexander.

Seattle-based Botanical Designs is an example of an established company with recurring revenue — it enriches commercial spaces across the U.S. with biophilic design, plant care and holiday décor.

Edward McDonnell (MBA ’16) raised a traditional search fund during his second year at Darden and acquired Botanical Designs in 2018.

From search to acquisition took about 20 months, says McDonnell, who graduated with a degree in mechanical engineering from UVA and worked as an engineer before returning to Grounds for his MBA.

“I liked being an engineer, but I just had this entrepreneurial bug somewhere in me,” he says.

McDonnell ran Botanical Designs until stepping down as CEO this year. During his six and a half years leading the firm, it grew from a single location with 80 employees to operating coast-to-coast with 200 employees, bolstered by an equity recapitalization from a leading private equity backer in 2022.

“Entrepreneurship Through Acquisition provided me the opportunity to do very meaningful work — to decide the vision and path of an entire organization, and to engage an awesome team to achieve that vision,” he says. “There are very few other career paths that offer that type of autonomy and authority.”

The ETA experience, McDonnell adds, accelerated his personal growth far beyond what he might have experienced in a traditional career, which has better prepared him for future opportunities as an advisor and board member.

The coffee business is an example of reocurring revenue, with loyal customers returning frequently for their cup of joe. Darrell Ian “DJ” Pacheco (MBA ’23) was inspired to buy Shenandoah Joe Coffee Roasters in Charlottesville after learning about ETA at Darden. (Read more about Pacheco’s journey at the Darden Report.)

Financing an ETA Deal

ETA acquisitions are typically financed through a combination of debt and equity.

While some searches are self-funded using personal capital, the traditional approach is to raise a search fund from 10-15 investors.

“There are many ways to do ETA, and Darden students are very well equipped, given the education they receive here, to go out and search for, acquire and manage a small business,” says Alexander.

The Challenges and Rewards

ETA isn't without its challenges. Raising capital, finding the right business, and successfully transitioning from the previous owner all present hurdles.

The search itself can be grueling. The Stanford study reports a median search time of 23 months. And not all searches result in an acquisition.

But those who persevere may reap handsome rewards. Alexander says searchers who successfully exit their acquired businesses can see personal wealth creation in the millions.

According to Stanford’s 2024 Search Fund Study, for entrepreneurs who exited their business, the average equity earned was $5.7 million per person with a median of $2.25 million.

The overall internal rate of return (IRR) for search funds was 35.1%, with a return on investment (ROI) of 4.5 times the invested capital, the study said.

Red Flags to Watch For

While the potential rewards are significant, Alexander cautions aspiring acquirers to be wary of certain red flags:

1. Seller motivation: The seller may be looking to sell due to negatively changing market dynamics or an impending challenge to the business.
2. High customer concentration: There's risk in the transition from the original owner to the new owner, especially if some customers comprise a large percentage of the revenue and the relationships are tied to the previous owner.
3. Poor record-keeping: Small businesses may have inadequate accounting and systems. Alexander advises hiring an accountant to perform a quality of earnings review to verify reported revenue and profitability. 

“Failure is not failing to find a business,” Alexander cautions. “Failure is buying a bad business.”

The New MBA Playground

As interest in ETA grows, so does the ecosystem supporting it. At Darden, the number of students in Alexander's second-year ETA elective is up 50%. He also teaches the class in the executive MBA program, where enrollment has nearly doubled year-over-year. This year both the residential MBA and EMBA classes each had a waitlist.

Alexander says demand for ETA-focused independent studies is also growing with students eager to begin forming search funds and searching for businesses to buy while still at school.  And this year, Darden’s ETA club made its debut.

This trend isn't limited to Darden. Business schools across the country are seeing similar upticks in ETA interest, with major institutions hosting conferences and creating collaborative communities of aspiring acquirers.

In the fall of 2025, Darden will host the annual Southeast Entrepreneurship Through Acquisition Conference in partnership with Georgetown University McDonough School of Business, University of North Carolina Kenan-Flagler Business School, and Duke University Fuqua School of Business.

The Future of ETA

“At Darden through the case method, we teach our students to be leaders who can assess problems and address them quickly,” says Alexander. “That really prepares them well for wearing the many hats that are needed as a small business owner.”

As the baby boomer exodus from business ownership accelerates, ETA may become a dominant path for the next generation of business leaders. For today's MBA students, the dream of being a CEO straight out of business school is more attainable than ever.