They’re hidden in the entrepreneurship through acquisition market.
The numbers tell a compelling story. Over the next decade, approximately 2.9 million small businesses collectively valued at $10 trillion and employing more than 25 million people are expected to undergo ownership transitions. This represents the largest transfer of wealth in human history. Meanwhile, Entrepreneurship through Acquisition (ETA) has exploded from 20 search funds launched in 2013 to 94 in 2023—a 370 percent increase that has generated historical returns averaging 35.3% IRR and 5.2x return on invested capital over 38 years (Transform Finance). There’s even a social media platform, Searchfunder, where “searchers” connect to trade ideas on buying operating small businesses (hence the squirrel image).
ETA has proven itself as an asset class. With 63% of searchers successfully acquiring businesses and median pre-tax returns of approximately $2.25 million for entrepreneurs. This is the path for the risk-averse MBA who is dubious of the tech path. Yet only $682 million was deployed into small business acquisitions through search funds between 2022-2023—a fraction of what's possible given the market size.
Such an enormous upheaval of our small business economy offers not only a powerful investment opportunity, but an opportunity to rewire income inequality in our generation.
Transform Finance recently released their report on "Social Entrepreneurship through Acquisition" (sETA), which perfectly captures this opportunity. The report defines sETA as "a mission-first orientation within the ETA practice" that embeds social impact considerations into each stage of the acquisition process—from fundraising through exit design. Small Capital's approach exemplifies this sETA framework in action, demonstrating how employee ownership can be systematically integrated into profitable small business acquisitions rather than treated as an afterthought.
Employee ownership (EO), by contrast, faces a scaling challenge. Despite policy advancements, supportive lenders, and growing recognition of its benefits, EO adoption remains limited. Most EO efforts focus on convincing current business owners to donate or finance the movement of equity to employees, or on cultivating employee buyout deals from scratch. These approaches, while valuable, are inherently slow and resource-intensive.
Companies with EO structures demonstrate 5% higher productivity in the first year post-implementation, 9% higher EBITDA margins, 6x greater likelihood of surviving 40+ years, and 4x better employee retention rates (Common Trust). If EO delivers superior performance metrics, why isn't it scaling faster?
The answer lies in where we're looking for deals.
Lower middle market M&A activity is skyrocketing, driven in large part by the ETA boom. While EO advocates work to create new deals, thousands of profitable small businesses are changing hands through existing acquisition channels. If we want to accelerate employee ownership adoption, we must position EO capital where the deals already exist.
This realization has led Small Capital to a thesis backed by years of research. Rather than competing with ETA for deal flow, employee ownership investors should co-invest alongside ETA transactions.
In the past year alone, Small Capital has observed over 250 live search deals—representing only a fraction of total ETA activity. Each transaction presents an opportunity to introduce employee ownership structures that benefit all stakeholders: sellers receive liquidity, searchers gain operational advantages, and employees build wealth through profit participation.
The venture capital industry has normalized employee option pools, recognizing that shared equity aligns incentives and attracts talent. In ETA, the case for employee equity participation is even stronger. Sellers often care deeply about their team's future under new ownership, and new operators need to build trust with inherited workforces. Employee ownership addresses both concerns while providing measurable business benefits.
Yet option pools remain rare in ETA transactions. In venture capital, equity is relatively cheap to distribute because businesses aren't yet generating cash flow. In profitable small businesses, there's less financial incentive to share equity when current cash flows can support competitive compensation.
This creates both a problem and an opportunity. If we want more ETA deals to include employee ownership, we must find ways to capitalize that equity rather than expecting entrepreneurs to donate it from their returns.
The key insight is that employee ownership doesn't require reinventing deal structures—it requires designing financial instruments that integrate seamlessly with existing lower middle market transactions. Rather than pursuing bespoke, one-off employee ownership conversions that demand months of specialized legal work and custom financing arrangements, Small Capital's model creates standardized tools that can be deployed across multiple deals. This approach transforms employee ownership from a niche, high-touch specialty service into a scalable capital product that works within the established rhythms and economics of small business M&A. The goal is making employee ownership as routine and accessible as SBA lending or traditional equity financing.
Small Capital's approach addresses this capitalization challenge through redeemable preferred equity positions that include employee ownership from day one. Rather than waiting for sellers to volunteer equity or entrepreneurs to reduce their stakes, we provide the capital necessary to fund immediate employee profit sharing and long-term ownership transitions.
This isn't just about financial returns. Project Equity estimates that one in six private sector workers in the United States is employed by a business facing ownership succession in the next decade. The decisions made during these transitions will determine whether millions of jobs remain stable, whether local wealth stays in communities, and whether working families can build generational assets.
The Transform Finance sETA report identifies this systematic approach as essential for the field's growth, noting that "real impact requires intentional design across capital, governance, incentives, and operator support." Their framework demonstrates that employee ownership integration must be built into deal structures from the outset rather than retrofitted after traditional acquisitions close.
Imagine a future where employee ownership becomes standard in every ETA transaction. The silver tsunami, rather than concentrating wealth among a narrow group of investors and entrepreneurs, becomes a mechanism for broad-based wealth creation. Workers who built these businesses over decades participate in their ongoing success. Local communities retain economic anchors. The inequality that has defined the past generation begins to reverse.
This vision requires moving beyond isolated employee ownership conversions toward systematic integration with existing M&A activity. It demands capital products designed to work within current deal structures rather than replacing them. It necessitates demonstrating that employee ownership enhances rather than compromises returns.