In the current market, it can prove challenging to find a growing, high margin business with recurring revenues, which is available for a reasonable price. In my experience, some of the more traditional “search fund type” businesses have been picked through, and sellers are aware of the high value the market will pay for their businesses. As such, they may be the most challenging to acquire: Alarm companies, for example, seem to be priced extremely high in the market, possibly too high for an acquisition by anyone save a strategic. More reasonably priced companies are sometimes found in unglamorous or lesser known service businesses. Some examples below:

• BPOs

• Certification Courses for Safety and Compliance

• Pollution Controls (wastewater treatment, chemical disposal, etc.)

• High Value Testing Services, except where the employees could be trained with a weekend course

• For-Profit Education

• Associated Software for Service Businesses

• Medispas for Cosmetic Treatment (Botox, varicose veins, etc.)

• Ophthalmology Centers

Some searchers have had success with behavioral health centers, but valuations seem high to me. Roll-out strategies can take advantage of high cash on cash returns of opening new centers, along with synergies from a clustered geographic model such as advertising.

Generally, I recommend that searchers start in an area with which they are familiar. It is easier to evaluate an industry where you have established contacts and then move laterally from there.

While a proprietary component to a search is always necessary, brokers can be an excellent source of information for researching a particular industry or identifying new industries. Even if a particular deal from the broker does not seem appealing, the CIM will still provide industry information. Ask the broker about other verticals they would suggest you evaluate. Lists of brokers can be found from other searchers: Start here. Regional brokerage groups can also be found through simple web searchers. For example, New England Business Brokers Association.

It is important to accurately describe the industry a company is in, and so both the company’s services and customers need to be considered. Take flood remediation services as an example. At first glance, it may appear that homeowners are the customers. However, the “true” customers who must be approached could actually be the insurance industry, which connects the services to the homeowners. Are you really in the remediation industry, or are you in the insurance industry? If the latter, how does that affect your approach? What are the tailwinds, or lack thereof, of that industry, and what are the quality of the customers?

Speaking personally, I am open to evaluating industries that may not check all of the traditional “search fund boxes.” Other investors may disagree with me here, which is of course fine.

Identifying industries

I have not used all of these, but they have been recommended by various search fund operators or public equity investors. Some may require a subscription.

• Go through the SIC and NAIC codes: https://www.naics.com/sic-codes-industry-drilldown/ to learn about different industries.

• Consulting firms oftentimes produce lists of the top growing industries. This may provide ideas, or may also provide ideas of attractive customers, whose vendors you can then examine for an acquisition.

• Hoovers (Dun and Bradstreet); Please note that I have heard some people mention that their data is not always the best.

• Bureau of Labor Statistics: https://www.bls.gov/iag/tgs/iag_index_alpha.htm

• Inc. lists.

• Chamber of Commerce listings.

• Industry associations, along with larger lists aggregating different industry associations. These are easily found on Google.

• It might seem obvious, but skimming through the WSJ, Financial Times, NYT business section and Barron’s can alert you to new industries.

• Look at the websites of different private equity groups to see what they are targeting.

• The Business Journals have company lists, based on MSAs. Once a year they put out lists which contains good information such as the fastest growing companies in Tulsa. Many of these businesses are likely not found on the Inc. lists.

• One searcher mentioned that combining sectors could sometimes produce interesting ideas: For example, data centers may be too capital intensive to be considered good search fund investments. Janitorial services or security guard services could be considered unattractive industries, with low margins, low differentiation, etc. But what about cleaning services for datacenters? This combination could potentially be more specialized and profitable.

• Talk to former searchers (now CEOs) and investors about recently acquired companies. They may be in industries where there are still opportunities.

• Another approach is to work backwards and locate very strong customers. Large and profitable companies have an ability to pay large sums to vendors. Then, talk to the CFOs in the industry and ask them to identify the smaller vendors they find most valuable.

• Statista

• SimilarWeb

• Brokered sites such as like Axial, DealNexus, Generational Equity, and Woodbridge can help provide industry ideas along with specific opportunities

• If there are public companies within an industry, search their investor relations website for information. Great industry info can be found from the CEO’s quarterly call recordings. Reading quarterly call transcripts is also possible through Seeking Alpha though requires a subscription last I checked.

• For financials of the public companies, search Edgar filings. Pay attention to metrics that may determine barriers to entry, such as high return on equity or return on capital, high profit margins, recurring revenue, strong growth etc.

Generating Company Specific Ideas

• I have heard mixed reviews about trade shows. My sense is that they can be extremely beneficial in terms of learning about an industry and specific companies. However, some searchers have mentioned they felt it was a waste of time.  Nevertheless, even if you don’t attend a conference you signed up for, you may still be able to purchase the list of attendees, which can be valuable.

• SourceScrub is expensive ($12,000-$18,000/year) but I have heard positive reviews of it, specifically the fact that it allows searchers to save large amounts of time while generating lists. While I haven’t used it, I am told it provides lists of conferences, where companies (with high accuracy contact info) can be identified. Once you generate a list, you can download it and easily upload to your CRM.

• Once you have identified industries of interest and acquired company lists, you can use third party providers such as Upwork (or interns) to help you weed out unattractive candidates. Determine the most important aspects of a target company (number of employees as indicator of revenue, geographic location, etc.), and then have interns filter out the lists for you.

• Sometimes brokers may not be on lists that are shared between searchers. Looking at smaller deal websites or message boards can help one identify additional intermediaries.  

• One searcher noted that, instead of picking niches, it was helpful to “pick a big area each quarter and then go deeper.” In such a way, a particular sector could be evaluated from a variety of sub-sectors and angles. For example, if a searcher were looking at Waste Disposal as a sector, you could look at medical waste disposal, specialized chemical disposal, safety training, etc. Comparing them could be helpful to see the more attractive segments: Which industries have the best margins, ROIC, customer retention, etc. Could the vendors and suppliers to these industries also be opportunities, etc. Sustained focus on a particular vertical will allow a very deep understanding that more cursory examinations would not. Furthermore, the ability to compare and contrast different industries within a vertical can shed light on where one should focus one’s time.