Unlocking the Secrets of Acquisition Entrepreneurship: A Deep Dive with Jason Ehrlich

The podcast features a deep dive into the world of small business acquisitions, highlighting the significant opportunity presented by the ongoing transfer of ownership from retiring Baby Boomers.

What is acquisition entrepreneurship? It is the practice of searching for and buying established, profitable small businesses - usually from a retiring owner. Fruition Capital invests in these businesses.

I invited Jason Ehrlich, Managing Partner of Fruition Capital on ATLalts to discuss why he believes investing in the acquisition of small businesses can allow investors to take advantage of what he believes are four key factors:

1. Generational transfer of US small businesses owned by Baby Boomers is underway. Greater then 3 million profitable businesses owned by 65+ year-old owners will change hands in the next 5-10 years
2. Attractive acquisition prices of 3x-5x avg. acquisition multiples (of EBITDA) for target businesses.
3. Probability of failure is low as only 2.1% of SBA 7a Business Acquisition Loans defaulted in 2023
4. The Chance of attractive performance is high as 75% of sesarch entrepreneur investors achieved an IRR of 20% according to one study.

Jason Ehrlich, Managing Partner of Fruition Capital, discusses how his firm focuses on investing in B2B companies with stable earnings and a repeat customer base, which he refers to as "enduring profitability." The conversation emphasizes the attractive valuations available in this space, often at 3x-5x multiples of EBITDA, and the low failure rates associated with these businesses, particularly in the context of SBA 7a loans. Ehrlich also elaborates on the unique structure of Fruition Capital, which differentiates itself by partnering closely with entrepreneurs while providing significant capital and operational support. As the episode unfolds, listeners gain insights into the strategies and criteria that make Fruition Capital a leader in this niche market, ultimately aiming to preserve and grow local businesses in communities across the U.S.

The impending retirement of Baby Boomer small business owners creates a unique landscape for investment, one that Fruition Capital is keen to navigate. Jason Ehrlich, managing partner of Fruition Capital, discusses the firm’s distinctive approach to acquiring established B2B companies that showcase not only a history of profitability but also a strong customer base. The podcast sheds light on the economic opportunities that arise from the generational shift in business ownership, particularly in light of the favorable valuations available—typically three to five times EBITDA for these enterprises. With a low default rate of approximately 2.1% on SBA 7(a) loans, the primary financing method for such acquisitions, investors are presented with a compelling case for entering this market.

Ehrlich elaborates on Fruition Capital's stringent investment criteria, underscoring the firm’s commitment to stability and enduring profitability. By intentionally avoiding tech-heavy or cyclically volatile industries, Fruition ensures that its investments are grounded in businesses that have demonstrated resilience over time. The conversation also touches on the structural elements of deals, such as seller notes and equity rollovers, which serve to align the interests of the sellers and the new owners, thus facilitating a seamless transition of leadership while preserving the legacy of these local businesses. This model not only safeguards the interests of investors but also places the entrepreneurs in a position to succeed as they take the reins of these established firms.

Furthermore, the episode highlights the broader societal impact of Fruition Capital's investment strategy. By empowering a new generation of entrepreneurs to take over small businesses, Fruition aims to keep jobs within local communities and foster economic stability. This commitment to community revitalization aligns perfectly with the firm’s investment philosophy, showcasing that financial returns and social responsibility can go hand in hand. As listeners delve into this discussion, they gain a deeper understanding of how strategic investments can not only yield strong financial outcomes but also contribute to the health and vibrancy of local economies.

Takeaways:

• The transfer of small business ownership from Baby Boomers is creating unique investment opportunities.
• Fruition Capital focuses exclusively on B2B companies with established customer bases for stability.
• Investors can benefit from attractive valuations, often at 3x-5x EBITDA multiples.
• The default rate for SBA loans used in acquisitions is impressively low at 2.1%.
• Jason Ehrlich emphasizes the importance of investing in enduringly profitable businesses with longevity.
• The podcast highlights the need for experienced entrepreneurs to guide successful acquisitions.

Companies mentioned in this episode:

• Fruition Capital
• Gramercy Park Wealth Advisors, LLC
• GPWA, LLC, Member FINRA/SIPC