In my previous article, I discussed how my perspective on entrepreneurship changed forever after discovering the serial acquirer business model.
While I touched on some of the benefits of the model in the previous article, this piece aims to delve deeper into the advantages and challenges to provide a more well-rounded picture for those considering this path.
Advantages
Compared to the singular focus of the traditional startup model where the success of the business is based on one core idea or innovation, the serial acquirer model provides opportunities to diversify across multiple businesses in different geographies and industries, lowering idiosyncratic risk and mitigating the impact of negative macroeconomic events.
Adding to this resilience is the serial acquirers’ focus on maximizing free cash flow instead of revenue. Unlike the venture capital model, which chases high-risk, high-reward moonshots, serial acquirers prioritize durable, less volatile returns that provide stability even under challenging market conditions.
Better yet, serial acquirers that take the approach of acquiring many small companies steer clear of the highly competitive arena dominated by large private equity firms. Instead of fighting tooth and nail in larger deals that typically have lower return on invested capital, serial acquirers like Constellation Software focus on scaling volume, with their median acquisition size being only $2.8 million. By focusing on smaller acquisitions, serial acquirers can purchase companies that fly under the radar of most private equity firms due to their small size and make acquisitions at more attractive valuations.
Challenges
Despite the numerous merits of the serial acquirer model, the successful execution of any business is never easy. The initial hurdle of obtaining the startup capital needed to make the first few acquisitions will likely halt many aspiring serial acquirers in their tracks if they do not differentiate themselves from the competition.
Even after obtaining the crucial initial investment, one must fight against many psychological pitfalls, such as survivorship bias, confirmation bias, herd mentality, and loss aversion to prudently deploy capital and effectively operate the business. Budding serial acquirers must throw away their egos and be diligent in learning from the successes and failures of their predecessors.
While there are treasure troves of valuable insights available through various resources online, the fallibility of human nature means many will only learn harsh lessons through experience. Reflecting on those failures and ensuring the same mistakes will not happen again, which is often more difficult than it sounds, are crucial to the long-term success of any serial acquirer.
The success of a serial acquirer also hinges on having a team that is in alignment, with all members focused on driving KPIs such as profitability, margins, and free cash flow growth instead of pursuing their own initiatives. Only when team members are aligned can the serial acquirer maximize the return on investment for shareholders and create a virtuous cycle where the they can continue to deploy more capital and grow.
After overcoming the initial difficulties of starting a serial acquirer and gaining some success, scaling the business comes with its own set of challenges. Although it may seem like a blessing to have a sizable amount of capital to deploy, serial acquirers must avoid the temptation of deploying capital as quickly as possible and instead maintain discipline while following a structured system that prevents overpaying for acquisitions. Maintaining a disciplined approach can be particularly difficult during frothy markets when everyone is making acquisitions while you sit on the sidelines. And while it is painful to sit on your hands, the enduring serial acquirers are those who control their impulses and wait for the right opportunities to emerge.
Conclusion
Although the serial acquirer business model isn’t without its significant challenges, aspiring serial acquirers who humbly learn from predecessors, align their teams appropriately, and employ disciplined capital allocation strategies can stack the odds in their favor and set themselves up for success.