Industry Selection for Acquisition Entrepreneurs

I boiled 100+ acquisitions and 500 client engagements into a few simple frameworks for starting your search. Here’s what the acquisition influencers won’t teach you: how to pick the right industry. 🧵

First, why should I care about the industry that I buy in? Shouldn't I just look at cash flow? WRONG! Your industry will make or break your life for the next several decades. And if you buy in the wrong one, the business might just eat you alive. Warren Buffett once said, "When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact". And worse yet, you probably haven't proven your brilliance yet lol I use this 4 step process to analyze industries with my clients: 1. Industry Revenue Matrix 2. Industry Production Matrix 3. Hard Filters (deal killers) 4. Thesis Buildout (how you’ll create value) Here's how to use each one

1. Industry Revenue Matrix I look at an industry's revenue breakdown on a 2x2 matrix: Customer type and Service vs. Product Focus Which matrix is the best for acquisitions? That's a loaded question, but here's the variables that you must understand will change across these profiles: [img:MaNbqbIQQ]

Customer Acquisition Strategy: Depending on who your customer is and what they're buying, the method for how you find them will change. Hint: You want a client base that values a brand and quality, not a low cost producer. Talent Recruitment: Depending on whether you are tethered locally or free to hire anywhere, your recruitment process will vary dramatically. HINT: I talk to tons of operators who's biggest struggle is that they cannot find good talent in their market. This is a do or die topic. Offer positioning: Every industry presents opportunities for niches, but some are more valuable than others. Typically.. there's more upside in a brand in a high ticket, high stakes service like CPA services vs. selling Iphone cases.

2. To the point of talent and offers, you gotta think about who's doing the work and where.. Use this framework to map that out: [img:Xnr5774qL]

Here's a combination of the two frameworks slapped together. In general... I like these characteristics the most (more on why later): 1. Skilled labor over unskilled 2. Local over global 3. B2B over B2C 4. Services over Products [img:9uFMmOfUX]

3. Hard Filters These are things you should almost always avoid as an acquisition entrepreneur. A) Operating leverage: High fixed costs in proportion to variable costs is a major risk for a debt fueled acquisition. If your sales volumes drop (which they will at some point), your at risk of imminent death. Examples of companies with large operating leverage: restaurants & gyms. Big fixed rent, utilities, and payroll. Small ticket items with tiny variable costs and slivers of profit per sale. B) Operating Complexity: Every business has some complexity, but how much? Watch your revenue per employee. As rev per employee trends down, its a signal that more coordination, hiring, training, firing, and babysitting is required. I work w one company that has a revenue per head of less than 15K. Take a guess at how much hair the COO has left on his head. C) CapEx: Similar bucket to operating leverage, but you won't see it in your EBITDA analysis.. businesses that need constant equipment maintenance and replacements just to live are brutal for leveraged acquisitions. It'll eat up whats left of your free cash. D) Cost-focused auction markets: In every industry, customers can get multiple quotes from vendors. But some industries have formal bidding processes where you are filling in your customers application form... if you're acquisition target has a whole estimating team to submit bids just to keep revenue steady, avoid. E) Cyclicality & seasonality: These are both keywords for "sometimes, we go long periods of time without making any money". Seasonality for months out of a year. Cyclicality for years out of a decade. Cyclicality is a major no no for debt based buys. Seasonality can be planned for. but plan well.

Step 4: Thesis build out How are you, Mr. Searcher, going to add value to this little fax machine driven shop you intend to acquire? If you said replace the fax machine and turn on google ads, you need a friend to talk to. And that friend is me. Use these frameworks to think about value add acquisition concepts:

Industry-level theses to think about: • Apply tech/automation • Apply AI • Use global talent • New delivery structure (pods) • New talent injections (A-players) • New customer acquisition engine Deal-specific theses to model: • Pricing (menu, floor, indexing) • Cross-sell / upsell paths • Working capital unlocks (terms, deposits, inventory turns) • Overhead reduction (rare—assume less than you hope)

Recap: Pick a quadrant you like, confirm the production reality, run it through the hard filters, then write a thesis that changes the unit economics (not just “grow sales”). Just make sure you know your industry well before you assume you can make these changes. Great acquisitions are picked before the LOI. Choose industries where the economics favor you and the filters don’t fight you—and where your thesis is obvious, testable, and cash-visible. Save this thread!