Entrepreneurship through acquisition (ETA) in Germany

Germany’s Mittelstand – its small and mid-sized, often family-owned companies – is the backbone of the country’s economic growth, but it faces an enormous challenge: business succession. Thousands of Mittelstand companies are looking for a suitable successor, and internal candidates are often lacking. This is not only a risk for the German economy but, above all, a huge opportunity for entrepreneurial talent. This is where entrepreneurship through acquisition (ETA) comes in.

ETA in Germany offers a faster, lower-risk alternative to the traditional route of founding a new company: instead of starting from scratch, an ETA entrepreneur takes over an established, profitable business – with immediate cash flow and existing customer relationships. A systematic target search process is essential here. In this article, you will learn how to use AI automation and ProxDeal to efficiently identify the best targets in the German Mittelstand.

What is entrepreneurship through acquisition?

Entrepreneurship through acquisition (ETA) describes an entrepreneurial approach in which, instead of founding a new company, the entrepreneur buys an established SME – acquiring rather than starting up. Unlike a high-risk new venture, the ETA entrepreneur benefits immediately from existing structures, customer relationships and cash flow. In Germany, this model is gaining considerable importance against the backdrop of the strained succession situation in the Mittelstand.

Most ETA entrepreneurs are management buy-in (MBI) candidates, often also referred to as ‘self-funded searchers’. These experienced managers finance the initial search phase themselves – usually from savings or short-term loans. Financing partners such as banks or family offices are only brought in once a specific acquisition is on the table. ProxDeal supports this group by automating the time-consuming manual search and enabling systematic target identification.

The search fund model in Germany

The search fund is a popular route for highly qualified managers and MBA graduates. Originally developed in the US, the model is also gaining traction in Germany. Investors – usually experienced entrepreneurs or business angels – provide the capital for the search phase. The aspiring entrepreneur spends one to two years systematically identifying a suitable target company. Once the right target has been found, the investors provide the funds needed for the acquisition – and the entrepreneur takes over as managing director with a significant equity stake.

Benefits of the ETA model

The succession gap: a challenge for Germany

The succession gap in the German Mittelstand creates ideal conditions for entrepreneurship through acquisition. The problem is structural: according to current estimates by IfM Bonn (Institute for SME Research), around 190,000 SMEs face an age-related handover between 2022 and 2026. As internal solutions are often not an option, these established and frequently highly profitable companies are coming onto the market.

Why the SME landscape is ideal for ETA

These companies are ideal for ETA entrepreneurs for several reasons: they have stable market positions, often specialised niche expertise and a loyal customer base. What they need is not a revolutionary realignment, but strategic development and digital transformation. The ETA model allows the entrepreneur to start creating value immediately, because the groundwork has already been done.

The psychological hurdle

Buying a company in Germany is often not a purely financial deal. For many owners, their SME is their life’s work. ETA entrepreneurs must convincingly demonstrate that they are not just buyers, but are genuinely committed to carrying the company and its values forward. This requires building trust, a clear vision and the ability to appreciate the company’s culture.

The systematic ETA process: from thesis to deal

Success in an ETA search depends on how systematic the process is. Without an underlying methodology, the search phase – which often takes up to two years – can quickly lead to frustration and an inefficient use of resources.

1. Sharpening the investment thesis

Before the search begins, the investment thesis must be clearly defined. ETA entrepreneurs need to specify precisely what kind of company they want to buy – using hard criteria:

• Industry focus
• Geographical region
• Financial metrics

Research from leading universities such as Stanford shows that focused searchers who concentrate on a single industry achieve a 100% higher acquisition rate than those with a broad focus. The more sharply these criteria are defined, the more efficiently the subsequent search process can be automated.

2. Manual search vs automated target identification

Traditionally, ETA entrepreneurs have relied on a time-consuming network of intermediaries, advisors and cold outreach. Given the sheer number of SMEs in Germany looking for a successor, this manual approach is hard to scale. This is where AI-powered automation comes in.

ProxDeal analyses hundreds of millions of data points and matches them against the investment thesis. Instead of spending weeks manually trawling through business directories and databases, ProxDeal generates a highly qualified longlist of potential targets in minutes – ensuring that no suitable companies are overlooked.

3. Initial contact and lead qualification

Once the longlist has been generated automatically, the next step is initial outreach – and this first contact should be both anonymous and professional. The pre-qualified longlist lets you focus scarce resources on the most relevant deals, dramatically increasing your probability of success.

Financing and deal structuring

Once a target has been successfully identified, the next step is financing. Deal structuring in the ETA process differs significantly from a start-up investment and requires a combination of equity and debt.

The financing structure of an ETA deal

Financing typically rests on three pillars. The foundation is the equity of the ETA entrepreneur and their investors – often organised as a search fund. Most of the purchase price is covered by debt in the form of bank loans, often from regional savings banks (Sparkassen) or specialised development banks. The decisive factor for lending: the acquired SME must already be profitable and demonstrate stable cash flow to service the debt.

ProxDeal delivers a double benefit here: in discussions with your bank, the detailed data behind the longlist shows that your target selection is systematic and data-driven – significantly improving your chances of securing a loan.

Minimising risk through due diligence

Due diligence (DD) is essential in the ETA process for minimising risk and validating the investment thesis. The three core areas are financial DD, legal DD and commercial DD.

Why ProxDeal matters in the financing phase

By presenting their backers with AI-powered longlists that have been systematically pre-selected from millions of targets, ETA entrepreneurs demonstrate the highest level of professionalism and process rigour. ProxDeal provides the data and methodology that investors expect from a structured search fund – significantly speeding up financing approval.

Conclusion

The ETA model helps to resolve the succession crisis in the German Mittelstand – through the systematic acquisition of established SMEs. One of the key success factors is automated target identification: only the precise selection of the right company minimises the risks of the acquisition and ensures that it can be financed. ProxDeal revolutionises the search phase with AI-powered filtering of millions of companies – so that ETA entrepreneurs can focus on strategic evaluation and securing financing right from the start.

Frequently asked questions