Which industry do I choose to acquire in?

Which industry should I choose when buying my first business?

That's a question I've been asked a few times now, and the answer (no, I'm not copping out here...) is, it depends...

Let me explain...

To first cut to the chase, there are a few key characteristics of an industry that are important, no matter what. The number one is are there plentiful sellers, and are they motivated?

You need to be working in an industry where there is an aging cohort, with little acquisition competition. If many of the business owners are old, a lot will want (or better yet, need) to sell. That's not the whole piece though. There's no use in being in a market with a lot of sellers, if there are a lot of buyers.

The last thing you want is to be in a position where there are multiple bids on every business you are trying to buy. As soon as there's any real buy side competition, the game becomes very tricky, and you need to set yourself apart in ways other than what you are offering financially - not an easy feat, especially if it's your first deal.

You see this a lot when considering industries that private equity have sunk their teeth into. Sure, exit multiples may sound exciting, but what about your entry?

I learned this the hard way in the vet industry. It's a small industry here, and there are a few key players/consolidators. So at the first thought of selling, the business owner would just speak to all of us consolidators and get an offer from each. Immediately, a seller that may have been motivated, now has options, which makes it hard to get a great deal.

Secondary to this, you ideally want to work in an industry where it is easier to fund the acquisitions. This simply comes down to risk. Assets are a nice to have, such as in industrial businesses, as the banks have some security against their debt, giving them some comfort. But you don't need assets. "Airball" businesses like healthcare (veterinary, GP, specialist medicine, etc) have no assets (hence the name "airball"), but they're unsexy and stable. If you google the failure rate of a veterinary clinic, you will quickly see why the banks are so comfortable lending there, despite the lack of hard assets.

When you consider this, you will understand why I did not go into e-commerce/online business acquisitions. There are few motivated sellers, zero hard assets, and inconsistent/high-risk revenues. A disaster recipe for m&a and the reason why most owner-operated ecom businesses only really end up fetching 2-3X multiples.

So, to summarise, a good industry:

1. Has a lot of motivated sellers
2. Has few buyers
3. Has assets in the business
4. Has predictable revenues

You don't need all of them, but you do need a combination of the above.

'Til tomorrow.

Dim Niko