Is an ETA Buyer the Right Fit for Your Business?
- Kyle Winder
- Mar 24
- 4 min read
Thinking of selling? Discover the ETA buyer playbook and navigate the risks for a successful exit.
About This Episode
A new generation of buyers trained in Entrepreneurship Through Acquisition (ETA) is looking for businesses like yours. Unlike private equity firms focused on roll-ups, ETA buyers are often searching for a single business to own and operate—making them a legitimate option for certain sellers.
Harvard professors Rick Ruback and Royce Yudkoff have pioneered this model, and universities across the country are now training ETA buyers to:
Acquire enduringly profitable businesses in overlooked niches.
Finance acquisitions using a mix of debt, investor capital, and seller financing.
Negotiate transition periods where the seller helps bridge the gap.
For some business owners, this can be an ideal exit. But there are risks. Keep listening because in this episode, you’ll also learn:
Why negotiating with an ETA buyer usually means a longer, more complex diligence process.
The telltale signs of an ETA graduate who is likely to struggle running your company.
How some ETA buyers misunderstand the soul of your business—and why that matters.
What to look for in an ETA buyer to ensure they can actually run your company.
The key is understanding their playbook so you can arm yourself for a successful negotiation and avoid the common pitfalls of selling your life’s work to an ETA grad.
About Our Guest
Rick Ruback and Royce Rudkoff
Rick Ruback and Royce Rudkoff are the co-hosts of Think Big, Buy Small, the weekly podcast from Harvard Business School that dives into the fast-growing world of acquisition entrepreneurship—the strategy of buying a small business and scaling it into a success.
With over 15 years of research and teaching experience in entrepreneurship through acquisition, Rick and Royce are recognized leaders in the space, helping aspiring business owners navigate the complexities of buying, managing, and growing their own companies.
Their book, HBR Guide to Buying a Small Business: Think Big, Buy Small, Own Your Own Company, has sold over 65,000 copies, making it a go-to resource for first-time buyers and seasoned entrepreneurs alike.
Definitions
Due-Diligence: This is a comprehensive appraisal of a business or investment undertaken before a merger, acquisition, or investment. It seeks to validate the information provided and uncover any potential risks or liabilities.
Earn-out: This is a financing arrangement for the purchase of a business, where the seller must meet certain performance goals before receiving the full purchase price. It reduces the buyer’s risk and aligns the interests of both parties post-acquisition.
Roll Over Investor: A rollover investor, in the context of selling a business, refers to an individual or entity that rolls some of their proceeds from the sale with the buyer. This strategy allows the seller to defer capital gains taxes and potentially leverage their expertise or resources in a new venture.
Debt Coverage Ratio: The debt coverage ratio is like a financial health check for a small business applying for a loan from a bank. It shows whether the business earns enough money to comfortably cover its debt payments.
In simpler terms, it’s a way for the bank to see if the business can afford to pay back the loan. If the ratio is high, it means the business is making enough profit to easily handle its debts.
But if it’s low, it could indicate that the business might struggle to make loan payments, which could make the bank hesitant to lend them money.
Let’s say there’s a small bakery called “Sweet Delights” that wants to expand its operations by taking out a loan from a bank to buy new equipment.
The bank wants to make sure Sweet Delights can afford to repay the loan, so they calculate the debt coverage ratio.
Sweet Delights’ annual net income (profit) is $50,000, and they have annual loan payments of $20,000 for existing debts.
The debt coverage ratio formula is:
Debt Coverage Ratio = Net Operating Income / Total Debt Service
In this case: Net Operating Income = $50,000 (annual profit) Total Debt Service = $20,000 (annual loan payments)
So, the debt coverage ratio would be:
Debt Coverage Ratio = $50,000 / $20,000 = 2.5
This means that for every dollar of debt Sweet Delights has, they’re making $2.50 in profit. In simple terms, the higher the ratio, the better, because it shows that Sweet Delights is making enough money to comfortably cover its debt payments.
This would likely make the bank more confident in lending them the money for the new equipment.
Arbitrage: Arbitrage refers to the practice of exploiting price differences or inefficiencies in the market to generate profits. In the context of selling a business, arbitrage may involve identifying undervalued businesses or assets, acquiring them at a lower price, and then selling them at a higher price to realize a profit.
This could involve various strategies such as purchasing distressed businesses, improving their operations or market positioning, and subsequently selling them at a higher valuation.
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