- How we vet and choose different types of businesses
- How to measure a business’s potential, based on different factors
- The market size and potential for growth of these businesses
- What industries offer the best potential for acquisition
If you’re looking to buy a business in 2023, there are many factors to consider. New trends and a flashy logo shouldn’t be what attract you to a company. Instead, there are deeply ingrained fundamentals that you should think about before approaching any acquisition.
Whatever type of business you're looking at, they each present their own challenges. While some businesses can give you more freedom with your time, they may take some time to generate profits. Others might be immediately profitable but consume a huge chunk of your working hours.
There are other deciding factors besides time and profits. Below, we explore many of the aspects you should weigh when considering whether or not to buy a business.
We also explore some of the companies that, in our experience, present the best opportunity for investment. This list was originally compiled for 2022, but we've updated it with more recent statistics and expanded the industries we discuss. These sectors have continued to show growth and resilience in the face of economic hardships, and we believe they make some of the best acquisition targets on the market.
Let’s dive in.
How We Chose the Businesses We Vetted
When looking for an established business for sale, there are a number of factors to consider. The training we offer covers all of this and more and our Acceleration Program delves into many of these considerations in detail. But below we’ll cover some of the higher-level considerations that any Acquisition Entrepreneur worth their salt should be thinking about.
1. Business Count
We have found that it usually makes sense to go after industries with many players. Simply speaking, the more businesses that operate in a specific industry, the more opportunity there is in the space.
It also presents an opportunity to consolidate companies through roll-up acquisitions (buying multiple companies and combining them into one entity) or scale organically by taking market share from competitors.
In particular, if your goal is doing a roll-up, you probably want to focus on an industry with at least 25,000 companies. This includes sectors like home services and certain professional services.
2. Business Moats
As Warren Buffet says,
The most important thing [is] trying to find a business with a wide and long-lasting moat around it … protecting a terrific economic castle with an honest lord in charge of the castle.
Moats are areas that keep direct and indirect competitors away (or at least slow them down). Moats exist at both an industry level and a specific company level. There are a number of different types of moats, but some of the most effective are technology and local moats.
These are moats that keep competitors away at a local level. They include licensing requirements, shortages of talent required to do a job, access to distribution channels to find customers or source goods, and high levels of capital expenditures required to participate in an industry.
The most common local moats are licenses – which can take years for a new player to get access to. For example, HVAC technicians all require licenses, whereas in many states industries like roofing don't require licenses.
This can be seen as either an advantage or a disadvantage. We personally believe a license-based moat makes an acquisition target more attractive because it creates a higher barrier to entry for any potential competition.
These are characteristics that keep away well-funded global competitors from consolidating an industry (and thereby driving down margins). Examples of industries being “globalized” in this way include Walmart taking over mom and pop retailers or Uber taking over local taxi companies.
Certain industries are more susceptible to these global players – and those primarily include businesses that have a fundamental flaw in their model that makes them vulnerable. This flaw could be a lack of inventory (local book stores vs Amazon) or a mismatch between supply & demand (taxi companies).
Before buying a business, you should think very critically about whether your own target industry has a major flaw or weak point that invites competition from global competitors.
3. Recession Resistance
Companies that take on leverage (like when using debt to finance a business acquisition) are particularly susceptible to economic downturns and fail at a much higher rate than during better times. This is why we specifically prefer focusing on buying businesses that can survive or even grow market share during a recession.
During times of economic difficulty, most people can’t afford to buy new homes so they turn to the home they have and look for ways to make improvements. Some homeowners may invest in a new roof, others in new floors. One family may wish to buy a new air conditioner while another may finally want to fix that plumbing problem that’s been bothering them for years. Essentially, anything to make their homes more comfortable.
Businesses that can tap into this need tend to do very well during recessions. This is true whether you’re talking about home services franchises or family-owned companies that have served a community for generations.
Recession-resistant business categories have a few specific things in common:
- They produce goods and services that are needed whether the economy is strong or weak (businesses that support consumption staples such as food, healthcare, and shelter).
- They don’t rely on consumer optimism as a key determinant of making a sale (i.e. luxury yachts and handbags).
- They are nimble in their ability to shift business models or product offerings to those that are more in demand during an economic slowdown (don’t require major re-training or acquisition of new assets).
- They have the ability to scale their workforce up or down as needed to meet demand.
4. Asset Heaviness
All other things being equal, it’s often best to focus on buying a business that has a high fixed asset base, which can include equipment or vehicles. There are three major reasons for this:
- Depreciation. When you buy a business that has significant assets, you are legally able to step up the value of those assets on your own balance sheet. This allows significant tax alleviation if you are currently earning a strong income.
- Financing. Lenders heavily prefer lending to companies that have a strong asset base. Their rationale is that if the business becomes distressed, the assets of the business can be sold in order to pay back any outstanding loans. This means you may find more (and easier) ways to finance the purchase of a business that has a significant asset base.
- Barrier to Entry. If a business requires a significant investment in assets to function, it can reduce the number of potential competitors in the market (especially over the short and medium term). This is because it becomes more expensive for each competitor to actually provide services to customers – limiting the number of entrants.
5. Net Profit Margin
This is a measure of the returns on invested capital that a business brings in. We’ve equated this for each specific business to its industry average.
For instance, Shopify noted that the average profitability of general retail brands hovers around 20-25%. That’s the percentage of the total revenue the owner gets to keep. But a net profit margin of 30% is a great result.
This number isn’t the same for all industries. So we noted that and separated underperformers from outperformers.
6. High Customer Lifetime Value
It’s important to consider how much each individual customer is worth to your bottom line over the course of your relationship with them. For example, residential HVAC systems need to be replaced every 12 years and each unit costs $12,000 to replace. In that period of time, you will likely provide some level of service, either in the form of repairs or routine maintenance. This often works out to a per-year value of over $1,000 per customer.
Compare that to residential plumbing. Over the course of the same 12 year period, you may have six service calls that cost an average of $350, giving you a total annual value of approximately $175 per customer.
On the other hand, commercial plumbing provides higher returns. If you’re doing routine jetting of restaurant drains, you’ll likely charge close to $300 per quarter. In addition, you’ll probably be the plumber on call for any other plumbing work they need. Considering the increased wear and tear of restaurant plumbing systems, that could very likely be one or two additional calls per year. That annual value is now closer to $2,000 per customer.
7. Demographics, Industry Growth, & Seasonality
The Baby Boomers are an incredibly large cohort and they have money to spend. If you have a business that directly serves their needs, it can be a big windfall. Think home healthcare services like nursing, mobility services, hospice care, physiotherapy/osteopathy.
It's true that businesses that show significant upside are likely to produce more opportunities for growth. But it's important to understand and exploit the reasons for this, namely:
- Rapidly growing industries often have less entrenched competitors – meaning you can gain a foothold in the space more quickly
- Rapidly growing industries have more opportunities for new vendors – as product/service buyers generally have less brand loyalty
- If you have a 1% market share of a $100 million industry and over time that industry grows to $200 million, you can double your business without needing to take market share from other competitors
Industry growth rate is measured relative to the growth rate of the US economy, which averaged 2.4 percent over the last five years. That means, if an industry is projected to grow at a more than 2.4 percent per year rate, it can be considered to be growing at an above-market rate.
Finally, seasonality is important when it comes to certain industries like HVAC. People in more temperate climates may not need their systems serviced as much as people in more inclement-weather regions.
Moreover, some companies rely on certain extreme weather events to drum up business. This is increasingly true as climate change worsens. For example, many roofing companies have begun relying on hailstorms in certain regions, while plumbers may be waiting for a bump in calls to pump septic tanks after heavy rainfall.
Look At Your Unfair Advantages
How we appraise the businesses we acquire is only part of the equation. It’s also important to consider what we bring to the table as the business owner. What is your unfair advantage? What is the thing you can do better than anyone else?
For instance, if you have a background in electrical engineering, you may want to consider buying an HVAC/R business. The key is to determine what your skills are, what your interests are, and what you can bring to the table when you acquire a company.
Acquira's Unfair Advantages
At Acquira, we learned through a lot of experiences (and plenty of mistakes) that our unfair advantages are:
Digital Marketing – The previous companies our principals ran each involved operating digital assets (think websites and software). In this area we are probably in the top 2 percent in the world. When it comes to brick and mortar companies, we are typically competing with the bottom 20 percent of the world.
Systematization and Training – We are particularly obsessive about systems and training. This combined with the Digital Marketing side makes recruiting a competitive advantage. This lends itself very well to industries where “manufacturing a workforce” is crucial.
Off Shoring the Back Office – Because our companies were all remote, we've always taken advantage of lower cost regions for all types of work. Most people on the team have a full-time off-shore virtual assistant (VA). If a salesperson or technician has a VA that can handle all of the necessary prospecting and follow-ups, that salesperson/tech will be able to spend much more time at actual appointments. Often an incremental cost of $500/month can make a salesperson or technician 50 percent more effective. If they are working on commission, they are making more money, and it's a serious retention tool and competitive advantage.
Those advantages helped us attract and funnel qualified buyers while disqualifying those that weren’t a good fit, and that was the beginning of our recruiting, training, and onboarding offerings.
Our offshoring experience also allowed us to create systems where we paid our onshore employees more money to concentrate on revenue-generating work.
The combination of these factors – our criteria for vetting businesses and our unfair advantage – got us interested in Home Services businesses in the first place.
Businesses in the Home Services sector met many of our criteria while offering a lot of potential for growth spurred by digital marketing and offshoring efforts.
This led us to another realization: we really like companies with a service area that is at least a 50-mile radius and is extensible over time. Ideally, you should be able to grow the service area to a 150 or 200-mile radius.
For example, companies like restaurants, laundromats, car washes, and daycares have a service area of about a 5-mile radius.
An HVAC or plumbing company has a service area at least 10 times that, as your technicians drive to the customers' homes. Simply allowing technicians to take trucks home and send them directly to job sites in the morning can expand your serviceable area, or you may need to open new offices or warehouses in key strategic areas. With a solid digital marketing plan, and assuming you have the staff to support the workload, you could potentially grow the number of serviceable customers by 40 times that of a landlocked restaurant.
With all of this information, we hope it’s obvious that finding a good company takes more work than just locating someone who wants to sell a business online. It takes patience, hard work, and a lot of research. Now, while no two businesses are the same, we have found that certain industries tend to perform better than others. We’ll give you a full rundown of the companies we recommend below.
So, based on the criteria, which businesses won out in 2023?
Best Business To Buy Scorecard
When we look at a specific industry to acquire in, our investment thesis has us ask ourselves a few key questions:
- Who comes to my house?
- Would I pay over $80/hour for their service?
- If I lost my job, would I still pay for this service?
These questions really allow us to focus on our strengths, while mitigating what we feel is a large risk (the economy).
Below, we've compiled a scorecard of some of the industries we're most bullish on. Each business is ranked on the various categories listed above. Green is above average, yellow is average, and red is below average. These businesses align well with Acquira's investment thesis.
Obviously all green is ideal, but keep in mind those businesses typically sell for higher multiples. We're okay paying 2x for a company with one red, or a couple of yellows. Our Accelerator Program has a significantly more complex calculator that outlines how much you should pay based on your own weighting of the criteria in your investment thesis.
Here's Acquira's Best Businesses To Buy Scorecard:
Best Businesses to Buy in 2023
The demand for Heating, Ventilation, Air Conditioning, and Refrigeration (HVAC/R) has remained consistent through tumultuous economic times. HVAC/R contractors repair and install air conditioning, furnaces, and refrigeration systems.
The industry certainly passes the recession resilient test, given that even in the toughest of economic times most people still want their homes at least to be comfortable. The overall industry has a projected CAGR of 6.1% between 2021 and 2026, well above that of the overall US economy.
Acquira has some experience in the HVAC industry, having grown one company’s revenue by 31 percent over a period of eight months. You can read about that story here.
The combined HVAC/R and plumbing industries accounted for approximately $174 billion in revenue in 2014, and that number has only grown in the years since. The plumbing sector alone accounted for approximately 425,000 jobs and is expected to grow a further 12 percent by 2024.
There are a number of factors that make plumbing businesses an interesting investment option. For one, smart technology is making its way into the bathroom, with the smart bathroom fixture market expected to be worth $6.6 billion by 2027.
In fact, the US Plumbing Fixtures & Fittings Market is expected to grow by $5.44 billion in the period 2020-2026, progressing at a CAGR of 6.5% over the same period.
As of October 2021, approximately 10.5 million homes in the United States were between 20 and 31 years old, and shingles don’t last forever.
Most homeowners are looking to replace their shingles before the warranty expires. As houses across the country age, the roofing market is increasingly made up of replacement work. As a result, the roofing industry continues to grow – between 2015 and 2020 the roofing industry grew by an average of 2.7 percent each year. For comparison, the US auto industry fluctuated between 0.5 and -1.5 percent year-to-year in the same period.
In 2021, the roofing industry was projected to reach nearly $20 billion. Meanwhile, the market size of the Roofing Contractors industry in the US increased faster than the Construction sector overall. And according to the 2019 US Bureau of Labor Statistics, there were 197,390 roofing contractors employed.
An interesting note about this sector: most insurance policies require homeowners to obtain verification that their roof is still serviceable from a certified roofer. Insurers require the roof to be replaced based on the age of the roof/time in the policy. They can effectively cancel coverage if the homeowner doesn't comply.
4. Home Healthcare
As the Baby Boom generation continues to age, home healthcare providers are becoming an increasingly relevant sector.
This concept is especially compelling when you consider that “hospital at home” programs allow patients to receive acute care at home with fewer complications and a significant reduction in the cost of care – as much as 30 percent.
A few statistics about the industry:
- As of 2021, there are 429,045 Home Care Providers in the United States, an increase of 3.7% from 2020.
- Between 2016 and 2021, the market size of the Home Care industry in the US has grown 3.3% per year on average.
- The Bureau of Labor Statistics projected the addition of one million home care jobs by 2029, even before the pandemic.
5. Pest Control
The Pest Control industry as a whole experienced steady revenue growth over the five years leading up to 2021. The scourge of bed bugs in many urban centers led to an increase in business, while fears over the Zika virus prompted more businesses to seek out professional help in eradicating their pest problem.
The industry is projected to have a revenue of $28.1 billion in 2027 and a CAGR of 4.5% from 2020 to 2027.
There is increasing demand for electricians, even as the industry struggles with a shortage of qualified workers. The US Bureau of Labor Statistics points out that electrician jobs are expected to grow by 9 percent between 2020 and 2030, slightly above the average growth rate for all occupations of 8 percent.
This increase is in tandem with a rise in residential electrical permits, which right now is up 31.6 percent from its pre-pandemic levels. However, it doesn’t take into account the rise in residential and light commercial EV charging, increase in battery storage, and solar integration proliferation.
7. Home Restoration & Remediation
Currently, the restoration industry is worth approximately $210 billion, spurred on by new technologies and the increasing intensity and occurrences of natural disasters like storms, floods, and wildfires. This is coupled with the fact that the age of homes and infrastructure across the United States is increasing.
While the Leading Indicator of Remodeling Activity (LIRA) forecasts year-over-year growth in homeowner remodeling and repair spending to shrink by the third quarter of 2023, there are many positives within the sector.
“Although remodeling market gains are expected to cool significantly next year, homeowners still have record levels of home equity to support financing of renovations,” says Abbe Will, Associate Project Director of the Remodeling Futures Program. “Energy-efficiency retrofits incentivized by the Inflation Reduction Act of 2022, as well as disaster repairs and mitigation projects following Hurricane Ian will further support expansion of the home remodeling market to almost $450 billion in 2023.”
One of the more interesting things about the cabinetry sector is the diversity in segments. Namely, kitchen cabinets, bathroom cabinets, entertainment center cabinets, home office cabinets, and others.
The cabinetry industry continues to see growth heading into 2023. Indeed, demand for kitchen cabinets is projected to rise 4.6% annually to $17.3 billion with unit demand totaling 101.8 million, according to a report from The Freedonia Group.
The growth is being spurred by design trends and desire for increased storage. Manufacturers are also making efforts to include more amenities into cabinets including LED lighting, racks, and pull-out shelves that increase the average sale price.
Meanwhile, Freedonia projects demand for tall cabinets to grow to $2.8 billion in 2023.
The global countertop industry stood at just under $90 billion in 2019 and is expected to grow to just over $110 billion by 2027, exhibiting a CAGR of 2.8% during the forecast period. Natural stone makes up approximately one-quarter of the total.
The general upswing in the global countertop industry coincides with an increase in the number of consumers who are seeking durable stones like granite. Consumers are choosing this material because it has a high aesthetic appeal and is highly durable.
These companies tend to be asset-heavy as well, with many large machines to facilitate cutting and storage. This asset heaviness can act as a hedge against inflation. Businesses in this sector also enjoy good margins, a large addressable market, and high revenue per employee, among other factors.
The ultimate goal of Acquira is to help Acquisition Entrepreneurs find great businesses in recession-resistant industries. We then want to help everyone grow their businesses so they can make a graceful exit, or expand their companies even more through roll-up acquisitions.
Roll-up acquisitions allow companies to expand at an even greater rate and sell for higher multiples. So if an owner opts to grow their business through acquisition, increasing their earnings along the way, when they do decide to exit they’ll be able to sell for as much as 7x or more of their EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization).
If you’re interested in starting your business buying journey, we recommend signing up for Acceleration Gauntlet – it’s a tool we’ve created to learn how to appraise companies and recognize your skill level. It also allows us to determine whether we’re a good match, as partners. Sign up for the Accelerator today by filling out the form below.
- Home services businesses are excellent candidates for acquisition.
- Acquiring a company takes many hours of research, knowing how to appraise those companies is important.
- The number of businesses in an industry often indicates how much potential for growth exists.
- The Industry Growth Rate is a strong indicator of whether a particular business will succeed.
- Think about what your unfair advantage is.
- We really like companies with a service area that is at least a 50-mile radius and is extensible over time
- Keep your investment thesis in mind and try to think outside the box when it comes to potential acquisition targets.
- There are many different types of businesses out there, find the one that you think you can add something to in order to help it grow.
Acquira is a business acquisition in a box service. We help entrepreneurs buy businesses and we invest in them and their chosen businesses. We are here to help ensure that each business we work with is posed to make the biggest positive impact possible for its owners, employees, and community.