Entrepreneurs no longer need a gap in the market, they just need cash
Entrepreneurship through acquisition could revitalise the UK’s business market, but budding entrepreneurs need cash to do it, writes Alex O’Leary
Viewers of BBC’s Dragons’ Den will be familiar with Liam Browne, whose pitch for his product “Full Power Cacao” (cacao powder taken from the cacao tree, which also produces chocolate) is often referred to as one of the most successful pitches in the show’s history. Liam pitched that the drink made from the powder would “overtake coffee as the number one morning drink by 2032”. He promptly secured a £50,000 investment from the Dragons and began his entrepreneurial journey.
Like Liam, many Brits aspire to be successful entrepreneurs. The Aspiring Entrepreneurship 2024 Report (commissioned by the e-commerce platform Shopify) showed that Britain’s entrepreneurial spirit remains strong, with 61 per cent of Brits expressing a desire to own their own business. The number is even higher amongst younger age groups – 73 per cent of 16–24 year-olds and 80 per cent of 24–34 year-olds.
The rise of entrepreneurship through acquisition
Unlike Liam, to become a successful entrepreneur you do not need to identify a gap in the market and pitch it to the Dragons. Entrepreneurship through acquisition (ETA) is an increasingly popular method of becoming a business owner without having to start a business from scratch. In fact, the business model has become so popular, particularly in the US, that many of its top business schools (including Harvard and Yale) will offer an “Entrepreneurship Through Acquisition” elective, to teach their students the skills required to acquire, manage and grow a small business, which many are choosing to do rather than pursue careers in banking or consultancy.
The model is also growing in the UK. However, Shopify’s Aspiring Entrepreneurship 2024 Report revealed (perhaps unsurprisingly) that the most common reason cited by budding entrepreneurs as to why they don’t take the plunge and buy a business is the lack of financial resources available to them. With an increasing number of people considering entrepreneurship through acquisition, many will need a bank loan to fund a significant portion of the acquisition costs. This is one area where the UK falls notably short of the US.
The US Small Business Administration (SBA), an agency of the US Federal Government specifically set up to assist small businesses, is at the forefront of small business acquisitions in the US. Acquirers are able to obtain loans of up to $5m dollars from participating lenders, with the SBA guaranteeing between 75 per cent to 85 per cent of the loan. This guarantee gives the lender the comfort to lend, opening the door to borrowers who may have otherwise struggled to obtain funding for acquisitions. The SBA-backed loans also come with more favourable terms, including longer repayment terms (up to 25 years), competitive interest rates and easier qualification criteria compared to regular bank loans.
US have shown us how it’s done
The rise of the ETA model coincides with the so-called ‘silver wave’ – the surge of baby boomer/generation X business owners now looking to retire. The SBA loan scheme has turbo-charged the transfer of small businesses in the US, enabling the succession of many businesses that would have otherwise shut down upon retirement of their owner. We are experiencing a similar wave in the UK, as illustrated by a recent study by Handelsbanken Wealth & Asset Management which showed that 30 per cent of SME business owners in the UK plan to exit within the next two years.
The Federation of Small Businesses estimate that 99.2 per cent of UK businesses are SMEs, employing around 60 per cent of the UK workforce and accounting for turnover of £1.8 trillion, making SMEs the backbone of the economy. Succession planning for SMEs should be at the forefront of the government’s economic strategy, with acquisition entrepreneurs offering a solution for those businesses where there is no obvious successor.
If, as Rachel Reeves stated in her recent Mansion House speech, the UK is in fact “open for business”, then surely it is time the government looked across the pond for inspiration. The implementation of a UK government-backed scheme similar to the US SBA loan scheme would help facilitate the succession of many fantastic small businesses as well as support the UK’s aspiring entrepreneurs.
Alex O’Leary is a corporate partner at JMW Solicitors in London