The Wall Street Journal recently ran a piece titled “This Shortcut to Private-Equity Riches Is Minting Young Millionaires.”
The “shortcut”? Buying a business yourself. You’ve probably heard it called a search fund, an independent sponsor deal, or entrepreneurship through acquisition (ETA).
It sounds simple: skip the corporate ladder, buy a company, become an owner, and make millions when you sell.
Between my own investments and running ASM, I’ve had a lot of conversations with people weighing this path. In quick, informal meetings, these are the two questions I find best pressure test the reality of moving forward.
Question #1: Have you run the numbers?
Many sponsors focus on hitting an acceptable investor return without looking closely at their own compensation through the hold period.
The management fee is a sponsor’s only form of annual compensation, and it’s not guaranteed. If earnings decline enough, creditors can turn it off. This is where having a cash closing fee in the bank to fall back on can make all the difference.
Sponsors should also make sure the deal is worth their while. In one conversation, the math simply didn’t work.
The total compensation an independent sponsor stood to earn was unlikely to beat what they’d make staying in their current role over the same stretch of time. The target company was too small, and the industry wasn’t growing fast enough to close the gap. It caught the person who’d reached out by surprise.
Here’s a simple template and video I share to help people run the math themselves (short version on IG).
Question #2: Have you fired someone?
It sounds harsh, but as an echo of Netflix’s famous culture memo, nothing determines company culture more than the ability to hire, promote and terminate the right people.
As a business owner or CEO, talent is your top priority. Hiring the right people and protecting your team will determine your future success or failure (see: Hire the Best People).
Most employees have never faced these decisions. Before you make the leap, know that you can.
See how high & low performers impact team performance: Video Short.
Go Deeper
Theory is great, but what’s it really like to make the leap? I like to encourage people to reach out to those that have done it, because the process always comes with surprises.
Here’s an ASM interview example featuring Ben Mackay who runs Brown & Miller Racing, a specialty manufacturer of hoses and fittings for race cars (and currently makes me jealous attending supercar showcases).
To be clear, these are just the questions I ask in early, high-level conversations with ASM subscribers who reach out about making this leap.
The full list of questions worth evaluating is far more detailed, and it only gets more nuanced from there: deal structure, financing, diligence, and what actually happens after you close.
If you’re seriously considering this path, ASM’s private equity training curriculum is built to walk you through that process step by step.