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A few months ago, we published an article about the 10 sectors most attractive to searchers (https://searchfundsnews.com/analysis-of-the-10-sectors-most-attractive-to-searchers/). Screening for the best industries as a searcher involves a comprehensive analysis of various factors to identify niches with promising opportunities for acquisition and growth. Here are the 10 steps to effectively do it and why you should create a “screening template” to qualify and discard some industries using “kill industry metrics” (industry revenue, annual growth, gross margin, fragmentation, etc.).
1/ Define your “Investment Criteria” and create scores to evaluate the sector:
– Market size and growth: Look for industries with a significant market size and consistent growth potential (e.g., at least 3-5% growth each year during the past 5 years).
– Profitability: Focus on industries with healthy profit margins and a history of stable cash flows.
– Fragmentation: Target fragmented industries with many small players, providing opportunities for consolidation and value creation through synergies (avoid industries dominated by very few players).
– Scalability: Evaluate if the business model in the industry is scalable, allowing for growth without proportionate increases in costs.
– Low capital intensity: Prefer industries that require low CapEx, making it easier to scale without significant upfront investment.
– Recession resilience: consider industries that are less sensitive to economic cycles and have steady demand, such as healthcare or essential consumer goods.
2/ Conduct market research
Once you’ve identified your favorite niches, complete your knowledge with industry reports, information from trade associations, analyst reports, and analyze the competitive landscape to understand the key players and market share distribution.
3/ Evaluate trends and drivers
– Technological advancements: Identify industries where technology is driving innovation and growth. Avoid industries that could be disrupted in the short term due to AI progress, such as translation companies for example.
– Regulatory environment: Assess the regulatory landscape to understand potential risks and opportunities, especially in Europe, where regulation is prevalent. Favor industries with stable or favorable regulatory conditions.
– Demographic changes: Consider industries that benefit from demographic trends, such as aging populations for healthcare services.
– Consumer behavior: Look for shifts in consumer behavior that create new opportunities, such as increased demand for online services (e.g., logistics) or sustainable products (e.g., green and impact economy).
4/ Financial metrics analysis
– Revenue growth and EBITDA margins: Examine historical revenue growth rates and margins of companies within the industry to gauge profitability.
– Valuation multiples: Study typical valuation multiples (e.g., EV/EBITDA, P/E ratios) in the industry to understand investment attractiveness.
– Debt Levels: Consider industries with manageable levels of debt, tending to 0 debt, as this can impact financial stability and acquisition financing. You need to be able to leverage the deal easily at a 50-60% debt ratio.
5/ Risk assessment
Evaluate market entry barriers to protect incumbents from new competitors, check supply chain dependence and potential vulnerabilities, and understand potential regulatory risks and technological disruptions.
6/ Personal fit and expertise
Consider industries where you have prior experience, knowledge, or a network. This can provide a competitive edge and help you adapt to your new role as a CEO more quickly. Choose an industry that aligns with your interests and passion, ensuring long-term commitment and motivation.
7/ Industry interviews and networking
Conduct interviews with industry experts and consultants to gain deeper insights, and attend major trade shows or industry conferences.
8/ Screening tools and frameworks
Use various analysis method (SWOT, Porter’s 5 Forces, PEST) to systematically evaluate an industry’s attractiveness and understand the macro-environmental factors affecting it.
9/ Benchmarking against successful SFs
It’s likely that other searchers in other countries have done similar deals in your chosen niche. Talk to them to identify patterns and lessons learned.
10/ Final selection and validation
Based on the above analyses, create a shortlist of 3-5 potential industries and start your search within these niches. We believe an industry-based approach is the best strategy to find a great company that aligns with your requirements.
