Getting up to speed on a new industry

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July 02, 2022

by a professional from University of California, Berkeley in Sacramento, CA, USA

Hi guys, as you're looking at deals daily, how do you quickly get up to speed on an industry?

I want to understand the driving forces behind a business, major competitors, why would someone want to get in or avoid a business. Whether this industry is a good fit for you.

How do you go about your own research?

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Reply by a searcher
from Babson College in Boston, MA, USA
Bob, I think a key aspect is "when is it worth your time?". I would say a case could be made for "just before/after LOI". Definitely NOT pre-IOI, as you aren't even sure a Seller has realistic price expectations. Until the LOI, you're not even sure if a Seller wants to deal with you exclusively yet. Industry research is a big investment of your time. It doesn't have the price tag of a CPA, but it's expensive. If you are using an SBA loan, each lender will have certain "no way" industries, or at least ones they really don't like that much. Learn these and ask them why. You really just need to avoid BAD industries (those in decline) instead of searching for the "best" industries. If you are getting an SBA loan, then the value creation comes from the leverage. If you are taking a conventional loan (~50%) with a 30% Seller Note, you're still doing an LBO and the value creation comes from the leverage as well. What I'm saying is the industry should be growing, but that's only one part of what will create value for you. You should calculate your companies self-funded growth rate or return on re-invested capital. See this HBR article https://hbr.org/2001/05/how-fast-can-your-company-afford-to-grow

After taking on debt, your company really can't growth any faster than your "self-funded growth rate", and you may not have enough Levered Free Cash Flow (LFCF) to achieve that rate of growth. Also, this article doesn't account for the need to deploy cash into increase maintenance CAPEX, growth CAPEX to sustain/support your planned growth.

If you stick to submitting IOIs & LOIs with companies with >15% EBTIDA margins, and that show slow steady growth slightly above GDP over the past 3-5 years, then you can rest assured you have found a company in an industry that works for your value creation model.


Get the LOI signed, and then spend cash/time on industry confirmatory research.
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Reply by a searcher
in New York, NY, USA
Others have mentioned the IBIS reports, don't forget that those are free on Searchfunder. You can also review equity research, as Onur recommended. But I also find it helpful to read through the 10-k or investor day presentation for a public company involved in the space. A supplier to the industry talking about their strong pricing power can tell you a lot about the competitive dynamics of the opportunity set you're reviewing. And lastly, it's worth speaking with current operators in the industry, even if for just###-###-#### minutes to get an overview of the key drivers they are looking at.
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