Identifying Your Perfect Match: How to Choose the Right Industry for Acquisition
Not all industries are equal in the eye of the acquirer
It’s easy to overlook the importance of industry when you see the dollar in a company
The truth is that most seasoned acquisition entrepreneurs stick to a select range of industries – because these are the ones that have been proven to generate a great ROI, time after time.
Of course, these rules aren’t always hard-and-fast. There are outliers and exceptions. But narrowing down which industries you should be looking at will save you a lot of time – and potentially a lot of money
Today, I’m going to show you why some industries are simply better than others for acquisition entrepreneurs. I’ll be covering:
- How to measure how safe an industry is
- What you’ll need to know in advance
- How to leverage your unique skills and advantages when making an approach
- Which industries are favored by the most experienced acquisition entrepreneurs
Let’s get to work
Your Portfolio vs. Your Targets
The first thing you need to ask yourself is how a business in any industry will integrate with your current portfolio
Buying into a completely new industry – as in the case of a conglomerate acquisition – can have advantages. However, most of the time, acquisition entrepreneurs are looking to exploit synergies between their newly acquired businesses and their current portfolio
This means that it’s often advantageous to move into a closely related industry. The examples I’ve provided later in this article include a diverse range of businesses that should give acquisition entrepreneurs with portfolios in any field food for thought
The “Unfair Advantage”
A critical part of choosing an industry is playing to your strengths or leveraging what we call the “unfair advantage.” This isn’t covered in the PATHS framework – but every acquisition entrepreneur instinctively knows how real it is
Your “unfair advantage” is something that you simply do better or know more about than most other entrepreneurs. For example, if you’ve moved into acquisition entrepreneurship from a background in green roofing, you’re uniquely placed to approach other businesses in this sector
Another example – you may have a software background specializing in project management. This puts you in a great position to look at innovative tech startups with inexperienced management or to approach SaaS providers – you already understand the core product.
This advantage is described as “unfair,” but really, you should look to leverage this advantage whenever possible. From identifying growth potential to post-acquisition management, it is incredibly useful
Should You Buy a Business in an Industry You Don’t Know?
Yes and no
As I’ve just covered, your “unfair advantage” is one of the greatest assets you have when selecting an appropriate target business
However, this shouldn’t preclude you from entering an industry that you don’t have prior experience in
The most important thing to remember is that whatever industry you plan to enter, you’ll need to learn about it in-depth BEFORE you start.
Prior research is always mandatory for acquisition entrepreneurs. You don’t just need to learn about an industry’s market – you need to learn what makes companies in this industry tick
If you’re willing to put the research in, the opportunities are limitless
How Does the Industry Align With Your Strategic Goals?
You’ll always want to identify synergies between your current businesses and your target company. This could include:
- Marrying the customer bases of each company (especially if they sell complementary services)
- Optimizing supply chains
- Making use of one business’s fixed assets/PPE if they could benefit another company in your portfolio
- Combining the experience or expertise of personnel across multiple businesses
There’s always an opportunity for synergy, and especially with businesses in unfamiliar industries, they’re not always easy to find
That’s your job. And your job was never meant to be easy
Entering a new industry can also help stabilize your portfolio. For example, if you currently operate businesses with a high earnings-to-net assets ratio, you could benefit from acquiring a company with more substantial assets and greater security
If an acquisition can’t be aligned with your strategic goals, that’s a huge red flag. You need to be sure that the acquired company will contribute to your portfolio and bring you closer to achieving your goals
Finding Your Perfect Match: The Questions You Need to Ask
How Resilient is the Industry?
Picture this (it’s pretty easy in the current economic climate!):
It’s a year since you purchased your new company. And now we’re experiencing a serious, unexpected recession
People are tightening their purse strings. Luxuries are unaffordable. Customers are prioritizing those things they really, really need
Is your industry one of these priorities? Does anyone need your service?
If not, you’re taking a big risk
How Many Businesses Are There in Your Target Industry?
If an industry has a huge volume of businesses, there’s probably a good reason for that
That reason is that the opportunity is clearly there – everyone wants to get a slice of the pie. It’s a confidence vote in the industry
Not everyone will succeed, but you’re much more likely to find a company with significant growth potential in an industry that boasts tens of thousands of businesses than one that is limited to a few hundred
Is the Industry Asset-Rich?
Understanding the true value of tangible assets is a rough lesson for many acquisition entrepreneurs, especially for those of you who’ve grown up in the Big Tech era
In short – your financial backers and your potential future buyers really, really like things that can be measured and touched
Tangible (especially fixed) assets can play a huge role in operational efficiency across your portfolio when managed properly. They’re also incredibly useful for tax purposes as they depreciate, and they’re one of the most stable guarantees that your exit will be successful
If your current portfolio is asset-poor, it’s time to enter an industry where assets are given their proper respect
Are Businesses in the Industry Moated?
Business moats are one of the greatest protections a company can have. You’ll need a solid understanding of local, national, and even international regulations to understand whether a target company has a substantial moat
A moat is essentially a barrier to entry. It makes it more difficult for competitors to enter the market and disrupt your business. Electrical contractors are a good example of this – in the US, it takes thousands of hours of training and significant licensing to qualify even as a journeyperson in this industry, let alone set up a business
Compare this to poorly regulated industries like construction, where there’s almost no barrier to entry. Cowboy builders are notorious both for stealing business from better companies and for dragging the industry’s name through the dirt
Free tip: construction companies don’t tend to make good acquisition targets!
Industries with well-developed business moats are far more secure than those with a low barrier to entry. This makes them far more attractive to acquisition entrepreneurs
To borrow a phrase from the kids – moated means GOATed
These are the industries worth investing in
How Much Does the Industry Depend on Seasonality?
There’s a very good reason that acquisition entrepreneurs – even those with a real estate background – tend to avoid hotels and hospitality like the plague
Almost all hospitality businesses come with some level of seasonal risk. This doesn’t just mean that you’re likely to experience significant downtime for part of the year (which makes staff management especially complicated)
It also means that you’re banking everything, annually, on a successful period that may be as short as 3 months
What if the main airline serving your destination goes bust? What if budgets are tight that year? What if you get unseasonably poor weather?
The takeaway – if it’s not consistent, you probably don’t want it
What’s the Industry’s Average Customer Lifetime?
Okay, I don’t mean the customer’s actual lifetime. The assessment doesn’t need to be quite that bleak
However, you’ll need to know how long customers typically stay with businesses in your industry
In long-term but routine industries like plumbing, HVAC, and accounting, it’s likely that customers will stick around for decades. This isn’t a decision that customers want to give much attention to – they buy what they trust
With businesses that have a much more incidental purchase rate, such as roofing, or companies with oversaturated markets, such as SaaS, the story is different
Customers are more likely to be fickle when they have:
- The luxury of choice. If you have a huge number of options available, why wouldn’t you shop around?
- Short memories. You could have done a fantastic job renovating a house 15 years ago – but will the customer remember you?
The takeaway? Customer lifetimes are significantly longer when you offer a necessary, repeat service and do a reliable, first-class job each time.
Always remember that – your customer base is everything.
Which Industries Are Best for Acquisitions? A Shortlist of Top Choices
HVAC & Refrigeration
This is always a great choice for acquisition entrepreneurs
HVAC/R has a unique set of advantages, especially in the US. These include:
- A substantial moat. HVAC professionals require 8,000 hours of training – you can’t set up a business like this if you’re not serious
- Year-round viability. While most people will get their HVAC systems checked before winter, and you may experience a couple of months of downtime, these systems need to be refreshed annually – and summer heat often requires repairs or replacements
- Recession resistance. However bad the economic climate gets, people need their HVAC systems to work
You’ll need to learn a lot about the industry before entering, but again – that’s your job. This is always a fantastic choice
Cleaning
We’re messy creatures. We’ll always need cleaning services. Exterior services such as pressure washing are very reliable
However, it’s commercial cleaning that gets my vote. Anywhere people are working, there’ll be a need to clean up after them
This industry also has a fairly low knowledge barrier to entry – it’s a great choice for a first-time acquisition
Accounting
A poor economic climate doesn’t mean that people don’t need to pay their taxes. This makes accounting services a solid choice
These companies also typically have accurate financial reports and are easier to appraise than most. They’re a great segue for acquisition entrepreneurs in tech industries who need something more substantial in their portfolios
Roofing
This industry has seasonal weaknesses, and its customer base can be somewhat fickle. So why invest?
Because people will always need roofing services
Top tip: choose your location wisely. Some states have more stringent regulations for roofers than others – the stronger the regulations, the larger your moat
Plumbing
Plumbing services will always be necessary. Their only drawback is that they tend to offer a fairly low annual return per customer
However, the consistency of demand more than makes up for that. It’s a knowledge-intensive industry, so you’ll need to conduct very thorough research if you’re going to approach a plumbing business with an attractive offer
SaaS
I understand that if your “unfair advantage” is strictly digital, this blog might’ve been somewhat disheartening
That’s okay. It should act as a caution because digital services are far less reliable than essentials like plumbing and refrigeration. Still, there are plenty of safe opportunities in the SaaS market
As long as we use the internet, businesses will need SaaS companies. Barring the collapse of civilization, these are fundamentally reliable and often have excellent synergy opportunities
Electrical
Electrical services have a very high barrier to entry and, thus, a well-developed business moat
The key issue is demand. Although they’re necessary, home electrical services tend to be annual or sporadic
However, if you find a company that has commercial contracts, you’re in a much more sustainable part of this industry. That’s where my money is
Home Restoration
Home restoration is boomtown when the economy is doing well – but is it worthwhile when finances are tight?
The short answer: yes
Even when your feed suggests that the housing market is dead, people WILL still be buying houses. And they’ll be restoring them, and they’ll need seasoned experts to do this. The industry is well-protected against cowboys
Those people who restore houses tend to have fairly deep pockets. And there are enough of them that the industry is fairly stable
It is more vulnerable than most other industries on this list, but it also represents a natural entry point for real estate acquisition entrepreneurs to diversify their portfolios
Key Takeaways
Your #1 takeaway from this article should be:
If people may not need it in a few years, it’s probably not an industry worth investing in.
Again – there are exceptions. It’s worth keeping an open mind
But it’s much more important to build a secure portfolio of companies that banks will actually give you loans for and that offer sustainable returns that will facilitate a successful exit.
It’s common sense. You already have it – now you can apply it
Want to learn more about the most opportune industries for acquisition entrepreneurs?
