Beginner's Guide to ETA: The Key Concepts You Need to Know

I remember the first time I was in a corporate environment back in 2011 (oh, those days when I had no back pain!). I was doing an internship at Mercedes-Benz in Germany, and for the first few days, I felt completely lost. Every sentence was made up of 80% acronyms, abbreviations, and jargon, and only 20% of words I had seen before. The worst part was that all of this seemed so obvious to everyone else that no one bothered to explain anything. And I, young as I was, didn’t dare to ask 🤷‍♀️. To save you from similar experience I thought I’d create a post explaining the general concepts of ETA as I understand them. Consider this your beginner's guide to ETA and a helpful resource to decoding the acronyms and jargon you’ll encounter.

Disclaimer: All the information here is based on my understanding of ETA. I’m confident I have a good grasp of the concepts, but I’m only human—so if I got something wrong, please keep me honest!

What is ETA?

Entrepreneurship Through Acquisition (ETA) refers to buying an existing small business to become an entrepreneur, instead of starting a company from scratch. The big advantage is that a small business already has product-market fit and is generating revenue and profit. That lowers the risk compared to a startup. As the new owner, you can apply your entrepreneurial drive to grow the business further.

Who Are Searchers?

People who pursue ETA are called searchers. There are two common models of search:

1. Traditional Search

• Funded by investors through a search fund

• The searcher is paid a salary during the search

• Once a business is acquired, the searcher becomes the operator

• The searcher earns equity in the business; the rest belongs to investors

  
  

Two big benefits: your search is financed, and you typically don’t have to sign a personal guarantee.

2. Self-Funded Search

• The searcher finances their own search

• Uses a loan, personal funds, or sometimes outside investors to buy the business

• Keep most (or all) of the equity and profits

  
  

The upside? Ownership. The downside? Higher risk, including signing a personal guarantee and needing cash (or investors) for the down payment.

In case you ware wondering, what a Personal Guarantee is...

When you take out a loan to buy a business, lenders usually require anyone owning 20% or more of the business to personally guarantee the loan. That means if the business defaults on any payment, you’re personally liable. Yes, this is where the "you could lose your house" warnings come in.

So, How Do You Find a Businesses?

This is where terms like deal flow, brokered search, and proprietary search come in.

Deal Flow

This is the stream of businesses that come across your radar. You can find deals on websites like BizBuySell or through business brokers.

Brokered Search

In a brokered search, you’re working with a business broker who represents the seller. Benefits:

• The seller is ready to sell

• They’ve been educated by the broker

• Documentation is usually organized

The tradeoff? You have to get past the broker first, and some can be tough to deal with.

Proprietary Search

This means reaching out to business owners directly. It could be through email, networking, or other creative outreach. If you build trust, you can often access a deal with better pricing, less competition, and direct communication with the seller. The downside is that this approach takes more effort (find business, connect with seller, hope they answer...) and it can take longer. 

I Found a Deal, And Now?

Once you’ve identified a potential business, you’ll need to review confidential information to decide if the deal is worth pursuing.

Step 1: NDA

You start by signing a Non-Disclosure Agreement (NDA). If a broker is involved, they’ll send it to you. If you sourced the deal yourself, it’s good practice to send your own NDA (reminder to talk to a lawyer).

Step 2: CIM

After the NDA, you’ll receive a Confidential Information Memorandum (CIM). It’s usually a PDF with business details and financials. I am not sure what a CIM looks like in a proprietary search or even if you get one, but you’ll still need to gather key financial documents.

Step 3: Financial Review - EBITDA vs. SDE

The main financial statements you’ll want:

• Profit & Loss (P&L): shows revenue, costs, and net income over time

• Balance Sheet: shows assets and liabilities at a single point in time

Together, they help assess the company’s profitability and financial health.

You’ll want to look out for add-backs—expenses that might go away under new ownership (e.g., meals and entertainment). 

With the financials in hand you can calculate the following three metrics:

• EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization. It reflects how much money the business earns from its operations before any financing or accounting decisions come into play. For example, if you buy the business and take out a loan, your interest payments will be different from the current owner's, so EBITDA gives a cleaner view of the company’s earnings potential. 

• Adjusted EBITDA = EBITDA + discretionary expenses + "excess" owner's salary

• SDE = Seller’s Discretionary Earnings =  EBITDA + discretionary expenses +  owner's salary. The SDE is basically the benefit the current owner is getting from the company. 

  
  

Once you have Adjusted EBITDA and SDE you can apply a multiplier to any of the two to get to a purchase price (or in more elegant words a valuation). For example:

• SDE of $100K × 2 = $200K purchase price → "2x multiple"

The multiple depends on the industry, deal size, and other factors.

Making an Offer: IOI vs. LOI

Now that you have an idea of what a fair purchase price might be, the next step is deciding what you would actually pay. That number isn’t always the same one the broker or seller has in mind. But let's assume you’ve landed on your number, and you’re ready to communicate it. You have two main options: send an Indication of Interest (IOI) or a Letter of Intent (LOI).

Both are legal documents that outline your proposed purchase price and general terms (this is the time to chat with a lawyer). From what I’ve seen, the difference between them is minimal. Some people send an IOI first and follow up with an LOI. Others skip the IOI and go straight to the LOI. It often comes down to personal preference.

Personally, I’ve put my own spin on it. I treat the IOI like a thoughtful letter—thanking the broker or seller for their time, adding a personal note from our conversation, and clearly stating how much I’d be willing to pay. It’s short and to the point. If the seller is interested, I move forward with drafting the LOI (and brace myself for the legal pain). If they’re not interested, we part ways and I save time. That’s what works for me, but there’s no one-size-fits-all approach.

Uff, this has been a lot. Hang in there. We have almost made it! Let’s stick with the LOI for a second and discuss two terms that you will hear a lot in relation to LOIs: 

• Deal Structure: how you’ll finance the deal (debt, equity, seller note)

• Seller Note: money the seller lends you as part of the purchase

These are big topics and deserve their own post, so stay tuned.

Due Diligence and Closing

Now you have an agreement, and it’s time to roll up your sleeves and dive into due diligence and also start talking to the bank. Due diligence means becoming your best Sherlock-Holmes-self and combing through everything: financials, operations, HR, marketing, sales, and legal. If you’re being responsible (which you should be), this is when you ask experts to help. You’ll want a CPA (aka accountant) and a lawyer by your side. Your CPA will perform a Quality of Earnings review, which is basically a fancy way of saying “go through the financials with a magnifying glass”, while your lawyer reviews contracts and scans for any legal red flags. At the same time, your lawyer will begin drafting the purchase agreement, which is the last piece of the puzzle before you officially become a business owner. If all goes well and the agreement is signed, you’ll be the proud new owner of a company. And then? Time to get to work with a solid transition plan for the first 90 days. 

Final Thoughts

Congrats, you made it through! I hope this breakdown of ETA concepts was helpful. I’ll be adding more sources and doing deeper dives on topics like valuation, deal structures, and legal docs soon.

If this post helped or you have questions, let me know in the comments. And if you don’t want to miss what’s next—subscribe!