How to select industry focus during your search

February 01, 2024

by a searcher from American University - Kogod School of Business in Upper Marlboro, MD 20772, USA

For searchers with a generalist background, can you kindly share the approach you used to select your industry focus?

I have a generalist background with more than 6years consulting experience. I am struggling to nail down which industries to focus on because I do not have expertise in any specific industry. From an industry type standpoint I am open to service, product, or distribution type businesses.

I would really appreciate if you can share any advice, resources, and materials to serve as a guide while I try to decide where to focus my search.

Thanks

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Reply by a searcher
from University of Virginia in Washington, DC, USA

I'm in a similar situation, so I'll share my insights on what I've learned so far and my thought process. Starting with an opportunistic approach rather than an industry-specific approach to searching is quite common. Initially, it helps to explore as many deals as possible to understand the types of industries and companies that align well with your skills, experience, and interests. Over time, for a successful search, it's crucial to shift towards an industry-based approach, gradually narrowing down to 1-3 industry areas you find most appealing. To identify an appealing industry, my initial thought process is similar to what ^redacted‌ already mentioned: For the most interesting sub-industries pair objective metrics (e.g., growth, margins, industry fragmentation, etc.) with more subjective metrics (e.g., interest, potential to leverage prior experience, business model complexity, etc.). As you evaluate more prospects, it’s normal to cycle through industries if you have a solid thesis backing your decision. I've seen some searchers start with one industry in mind and end up acquiring a business in another. It's all part of the journey, as long as you can support your shifts with a strong rationale. Ultimately, you'll need to demonstrate deep understanding and credibility to sellers, brokers, banks, and the SBA to seriously consider your interest. For those keen on incorporating a quantitative approach and have the time or resources (think interns), you might want to check out Exhibit 3 and 4 in this IESE document, which sheds light on the author's industry analysis technique: https://www.iese.edu/media/research/pdfs/OP-0269-E.pdf. Also, the Stanford Search Fund Primer offers practical guidance for selecting an industry.

Reply by a searcher
from Washington University in St. Louis in St. Louis, MO, USA

Its something I have been struggling with as well - Getting more granular on the aperture of my search

Some advice I've received is to begin looking at industries/sub industries that are interesting and where you can envision yourself as the operator. From there, create criteria that you want your business to have (ebitda margin %, recurring rev, low customer con, fragmented, growing, etc.) - these may be different for you. You can look at what mid market PE is buying or what other searchers have acquired through research.

I really like healthcare service - med spas, med equip service/repair, and chem manufacturing. Home service is also very popular and I like as well - HVAC, pest, trees, etc.

Hope this helps!

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