(Bloomberg Businessweek) -- In high school, Nick Wheeler dreamed of becoming a Green Beret. He achieved that during a decade-long Army stint, eventually leading a 12-man special forces team deployed in Eastern Europe.
After serving, Wheeler applied to a few MBA programs. The day after his interview at Harvard Business School, he met with a fellow Green Beret enrolled there and asked about his plans. When the veteran said he'd like to start a “search fund,” raising money to find, acquire and then run a small business, Wheeler was baffled. “What the hell is that?” he recalls asking. “It sounded like a ridiculous concept.”
Wheeler earned his MBA in May 2022 and has spent the past year reaching out to more than 5,000 firms in a quest to find what he calls the “golden seller”—that perfect company that would benefit from the leadership skills he honed in the military and the business chops he developed at HBS. He's come close, twice, but both deals fell through. He's undeterred, saying he thrives in uncertain terrain. “Most people don't,” he says.
Wheeler's path is becoming a more common one for business school graduates. Called entrepreneurship through acquisition, or ETA, it differs from the better-known, venture-backed startup model because it entails buying an existing company, not starting one from scratch, with the potential for more autonomy and ownership. ETA began at Harvard in 1984, when entrepreneur-turned-professor Irv Grousbeck helped some students develop an investment vehicle that enabled the aspiring entrepreneurs to buy and manage a company. Grousbeck soon moved to Stanford's Graduate School of Business and took the search fund concept there.
That's where it stayed for years, limited primarily to a handful of Harvard and Stanford MBAs. But a surge in interest and investment more recently has propelled ETA to a much higher profile. That's partly because interest in entrepreneurship picks up when job prospects dim for MBAs, as they have in 2023. Hiring has slowed in the consulting, finance and technology sectors that traditionally recruit most MBAs, and those who are getting hired are specialists in hot areas such as machine learning or data analytics, rather than generalist degree holders.
“When the job market gets tougher, this attracts more people,” says HBS professor Royce Yudkoff, who, along with his colleague Richard Ruback, has been teaching ETA courses for a dozen years. But that isn't the primary driver, says Stanford GSB lecturer Peter Kelly, who edits a search fund primer that MBAs refer to as the “bible.” Growing ranks of successful ETA entrepreneurs have spread the gospel, Kelly says, and schools are responding.
“Our alumni have been screaming about ETA for the better part of a decade,” says Xavier Stewart, senior associate director at the Wharton School's Venture Lab, an entrepreneurial center for students. “They said the school needs to focus on this.” Wharton has two ETA classes for MBAs and another for undergrads and awards $50,000 fellowships to as many as four students each year to help them conduct a search right after graduation. MBA programs at Yale, the University of Michigan's Ross School of Business and the University of Chicago's Booth School of Business, among others, have widened their ETA curricula. On campuses across the country, there are ETA clubs, conferences and informal meet-and-greets, where budding entrepreneurs can chat with alumni who've gone down the path already.
Most search veterans have good things to say: Nearly 3 out of 4 searchers who did an acquisition made a profit, and the annual tally of exits—when the company acquired is eventually sold—that generated a positive return has hit a record high, according to data from Stanford. The stats could make this sound a bit too easy—there's a lot of work that goes into it, and plenty of risk, the various faculty members caution.
First, one must decide what type of search to conduct and the kind of business to target. ETA typically happens one of two ways: It's self-funded or done through what's called a “core” search fund. The latter requires raising money from investors in two stages. The initial capital (generally about $425,000 per person) pays for all search-related expenses, like travel and administrative costs, plus the searcher's salary. The much larger second tranche funds the actual acquisition, typically within two years. As for targets, some searchers drill down on an industry or region, while others have a scattershot approach.
Self-funders, including Wheeler, have more freedom to choose what to acquire and can wind up with a higher share of equity ownership, but they usually end up buying a smaller company, because their acquisition budgets—often from Small Business Administration-backed loans—aren't as big. Working through a search fund provides the entrepreneur with advice, support staff and networking opportunities. “Our job is not just to write checks but to be very involved,” says Lacey Wismer, founder of Hunter Search Capital, who's worked with more than 100 searchers since 2010. “Every entrepreneur needs a different level of support.”
Historically, most searchers are White men—“there's not a lot of female representation in ETA,” says Angela Romero, who won a Wharton fellowship and is looking for a hotel management company to buy. But women, Black and Hispanic searchers are all gaining ground.
Failure is part of the process: 1 out of 3 searches ends without an acquisition being made. Discerning the whims of small-business owners, many of them baby boomers looking to retire comfortably, can require a degree in geriatric psychology. The competition for deals has also gotten fiercer now that big private equity firms are starting to roll up small local businesses such as plumbers and pest-control services. In response, ETA searchers are looking to buy more tech-driven companies like business-to-business software providers, according to investors and entrepreneurs.
The hours can be long, especially when a deal is being negotiated, but ETA provides more flexibility than most high-powered corporate gigs. “I do have more balance,” says Romero, who previously worked in technology. “Some days I work a lot, and some days I can hang out with my fiancé and friends.”
Leading a small business, especially one that hires locally and provides valuable services to a community, can also deliver the sense of purpose that younger generations crave but can't typically get in management consulting or investment banking. “The opportunity to lead and make an impact,” Wheeler says, “is one that I would not get at McKinsey.”
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