News Stories · Entrepreneurship - Start-up

Entrepreneurship through acquisition offers a fast path to business leadership

EMBA alumni help talented entrepreneurs become CEOs while delivering profits for investors.
November 2020

 - IMD Business School

Thousands of well-managed small and medium-sized enterprises (SMEs) worldwide, with strong growth potential, have no succession plan. This is a problem for their founders, who have often put in decades of hard work to build them up. But it is an opportunity for the next generation of entrepreneurs and for investors looking for ways to increase their wealth.

Such is the thinking behind an Entrepreneurship Through Acquisition (ETA)  program run by IMD EMBA alumni Elena Trukhina and Christian Malek (June 2018).

The pair began talking about the concept while still at IMD. “Many privately owned companies with revenues of €20m-€50m are probably too small for private equity firms to acquire,” Trukhina says. “The founders are reaching retirement age, having worked hard all their lives and if there are no kids in the family to inherit the business, or the kids don’t want to do what their parent was doing, the founders are looking for their business legacy to be kept in good hands,” Trukhina says.

NCA’s progam connects investors with talented entrepreneurs who are looking to locate, acquire, manage and grow a privately held company. “We focus on mutual benefit, profit and growth for all stakeholders,” Trukhina says.

The concept of search funds and ETA dates back to the 1980s in the US, where it was seen as a fast route for young aspiring business leaders. An individual seeks a company to acquire, raising pre-funding from co-investors to cover initial costs. On acquisition, the individual becomes CEO with a mandate to grow the business and in due course provide an exit for the investors.

Trukhina and Malek thought that their complementary skills would provide a good basis for focusing on ETA in Europe where the idea has not been widely implemented. Her background is in corporate, marketing, sales and general management for companies including Coca Cola, SABMiller and Nestlé. Malek’s experience is in banking and investment management, including for wealthy families —  NCA’s target co-investors.

“We realized that there are great opportunities because there is lots of talent wanting to move from corporate careers to entrepreneurship,” Trukhina says.

“Meanwhile, many investors are interested in private markets and private equity, but generating a proprietary deal floor is not that easy. For them, search funds are an interesting asset class.”

In February 2019, Trukhina quit her job in Moscow with Philip Morris International to return to Switzerland and begin setting up NCA with Malek.

Benoit Leleux, Professor of Entrepreneurship at IMD, let them test the concept in a foundational business leadership session. “We pitched it to the class to see what they thought, letting them tear us to pieces and give us lots constructive feedback,” Trukhina says.

The pair also talked to fellow IMD alumni, two of whom were so taken with the idea that they have joined the NCA advisory board — Mordy Rapaport and Olivier Utz. Rapaport is a second generation entrepreneur with extensive knowledge of operational excellence. Utz has a background in private equity with experience of turnaround and growth.  A fifth contemporary IMD alumnus has become one of NCA’s 14 co-investors.

“The networking that IMD brought to me, and the people I met there, were the biggest assets I gained together with the knowledge,” Trukhina says. “Many people in our class inspired me a lot. IMD is very diverse, with corporate people and entrepreneurs whose stories helped me understand what is possible. I would probably still be thinking about launching my own business if I had not met them.”

Entrepreneurs accepted on to the ETA program are funded to search for up to two years for a company to acquire within the area of their expertise. They are supported by NCA’s analysts, M&A experts and legal advisors. Once the company is found, the co-investors provide the acquisition funds and the entrepreneur becomes CEO, running the company for up to five years.

He or she is allocated up to 20% of the company’s shares  — a third on becoming CEO, a third within four or five years, and the final third on creating  liquidity for the investors. No co-investor has more than 15%, so on exit the CEO becomes the biggest shareholder.

NCA is currently funding seven entrepreneurs and plans to appoint 10-15 more in 2021 in Europe plus a similar number in the US. “This year was about putting the team of 13 and all the processes in place, next year we’ll probably grow to about 25 full-time employees,” Trukhina says.

“Feedback from stakeholders is all very positive, so although it’s still early stage we’re hopeful.”

Trukhina urges IMD students to think of ETA as an alternative way to have a career. “There is this path,” she says. “Not everyone knows or dares to take it. But if entrepreneurship is something you always had in the back of your mind I would really encourage you to get in touch, talk to us, and see if we can do it together in partnership.”