MBA is driving McKinsey to buy small businesses

(Bloomberg Businessweek) — In high school, Nick Wheeler dreamed of becoming a Green Beret. He accomplished that during his 10 years of Army service, eventually leading his 12-man Special Forces team deployed to Eastern Europe.

After his stint, Wheeler applied to several MBA programs. The day after his interview at Harvard Business School, he met with a fellow Green Beret at the school and asked him about his plans. When the veteran told him he wanted to start an “exploration fund” to raise money to find, buy and operate small businesses, Wheeler was perplexed. “What the hell is that?” he recalled asking. “It sounded like a ridiculous concept.”

Wheeler earned his MBA in May 2022 and has spent the past year researching 5,000 companies to find what he calls “golden sellers” – the perfect company that would benefit from the leadership skills he honed in the military. I have contacted more than one company. The business talent he developed at his HBS. He has come close twice before, but both deals fell through. Undeterred, he says he can thrive in uncertain terrain. “Most people don’t,” he says.

Mr. Wheeler’s path is becoming more common for business school graduates. Called entrepreneurship by acquisition (ETA), this differs from the familiar venture-backed startup model. This is because rather than starting a company from scratch, you may need to acquire an existing company, which can give you more autonomy and ownership. ETA began in 1984 at Harvard University, where entrepreneur-turned-professor Irv Grousbeck taught some students to develop an investment vehicle that would allow aspiring entrepreneurs to buy and run companies. It started with support. Grousbeck soon moved to the Stanford Graduate School of Business, where he introduced the search fund concept.

It was confined to a few MBAs, primarily from Harvard and Stanford, and remained there for years. However, a recent surge in interest and investment has brought ETA even more prominence. Part of the reason is that as MBA job prospects darken, as in 2023, interest in entrepreneurship will increase. Consulting, finance, and technology fields, which have traditionally hired the majority of MBAs, have slowed hiring and are hiring specialists in popular fields such as: Not as a generalist degree holder, but as an expert in machine learning and data analysis.

“When the job market gets tough, you get more people,” says HBS professor Lois Yudkoff, who has taught ETA courses for more than a dozen years with colleague Richard Rubach. But that’s not the main driver, says Peter Kelly, a Stanford GSB lecturer who compiles a primer on search funds that MBAs call their “bible.” Kelley said the school is responding as the number of successful ETA entrepreneurs grows and the gospel spreads.

“Our alumni have been screaming about ETA for the better part of a decade,” says Xavier Stewart, senior associate director of the Wharton School’s Venture Lab, an entrepreneurship center for students. . “They said the school needs to focus on this.” Wharton has two ETA classes for MBAs and another for undergraduates, serving up to four students each year. A $50,000 fellowship will be awarded to support research immediately following graduation. His MBA program at Yale University, the University of Michigan’s Ross School of Business, and the University of Chicago’s Booth School of Business have expanded the breadth of the ETA curriculum. Campuses across the country have ETA clubs, conferences, and informal meet-ups where up-and-coming entrepreneurs can chat with alumni already on the path.

Most search veterans have good things to say. Nearly 3 out of 4 of his acquired search companies turned a profit, and his annual tally of exits with positive returns (when acquired companies are ultimately sold) hit an all-time high. about it. To data from Stanford. If you look at the statistics, this may seem a little too easy. Various teachers have warned that this involves a lot of effort and a lot of risk.

First, you need to decide what type of search you want to perform and the type of business you are targeting. ETA is typically done in one of two ways. It can be self-funded or through what is called a “core” search fund. The latter requires raising capital from investors in two stages. The initial funding (typically about $425,000 per person) pays all search-related costs, such as travel and administrative costs, and the searchers’ salaries. The second, much larger tranche funds the actual acquisition, typically within two years. When it comes to targeting, some searchers dig into industry or geography, while others use a scattered approach.

Self-funders, including Mr. Wheeler, have more freedom in choosing what to acquire and ultimately earn higher equity ownership, but their acquisition budgets often come from loans backed by the Small Business Administration. Because they are funded, they end up acquiring smaller companies. — Not that big. We provide advice, support staff and networking opportunities to entrepreneurs through our Exploration Fund. “Our job is to be deeply involved, not just write a check,” says Lacey Wismer, founder of Hunter Search His Capital, who has worked with more than 100 searchers since 2010. “Every entrepreneur needs a different level of support.”

Historically, most searchers have been white men. “There’s not a lot of female representation at ETA,” says Angela Romero, who won a Wharton fellowship and is looking for a hotel management company to acquire. But female, black and Hispanic searchers are all gaining support.

Failure is part of the process. One out of every three searches ends without being retrieved. Identifying the whims of small business owners, many of whom are baby boomers looking for an easy retirement, may require a degree in geriatric psychology. Competition for deals is also increasing, as large private equity firms begin buying up local small businesses, such as plumbers and pest control services. In response, ETA searchers are looking to acquire more technology-driven companies, including B2B software providers, investors and entrepreneurs say.

Although the hours can be long, especially during deal negotiations, ETA offers more flexibility than most high-powered corporate gigs. “I have a better sense of balance,” says Romero, who previously worked in the technology industry. “Some days I work a lot, and other days I get to hang out with my fiancé and friends.”

Leading a small business, especially one that employs locally and provides valuable services to the community, provides a sense of purpose that younger generations aspire to and that management consulting or investment banking typically doesn’t provide. You can also. “The opportunity to lead and make an impact is something I didn’t have at McKinsey,” says Wheeler.

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