The best industries for buying a small business in 2023

The vast majority of entrepreneurs looking to buy a small business in 2023 are taking a generalist approach. In fact, according to recent numbers from SIG, only 8% of self-funded searchers plan to only look in one industry for a business to buy and another 27% plan to only look in 3 or less industries for a target to acquire.

That means that the vast majority of entrepreneurs considering a business acquisition are doing a generalist search. Well, what industries are the hot ones?

Analyzing an Industry for a Small Business Acquisition

Before we get into the top industries, it’s worth first discussing the criteria entrepreneurs look for in a business acquisition:

• Licenses & Regulation: Businesses that require a license have pros and cons. On the one end, having a license gives you some measure of defensibility against other people competing against you. For instance, owning an HVAC business in Texas requires you to have a contractor’s license which can take up to three years to get!

• Re-occuring & Recurring Revenue: On the spectrum from one-and-done to pure recurring revenue from a subscription, entrepreneurs prefer businesses with re-occuring (e.g., multiple projects for each client) and recurring revenue. It allows them to better forecast expenses and revenue.

• Recession Resistant: Searchers also like to avoid businesses that are closely tied with the macroeconomy. Given the current “recession” we’re experiencing in the public markets and with rates high, searchers are looking to avoid businesses that rely on heavy amounts of discretionary spending or new-home starts.

• Low Customer Concentration: Additionally, businesses that only service a handful of customers have high customer concentration risk. By that, we mean that if one customer decided not to renew or to work with another provider, these businesses could lose up between 25 and 50% of their annual revenue!

• Industry Growth: Of course, all entrepreneurs want to be in a growing industry. As the saying goes, a rising tide lifts all ships. It’s a lot easier to row with the current than against it.

• Strong Margins: Lastly, businesses that have higher margins allow owners to aggressively reinvest in growth and spend slightly less on SG&A and operations. This gives you a better buffer when paying down an acquisition loan.

The Top Industries for a Business Acquisition in 2023

Roofing Contractors

The roofing industry is seeing a surge of business buying activity. Entrepreneurs love businesses that focus on commercial roofing in particular as well as more routine residential roofing companies. Mills Snell is a good example of the former. He’s one of the cohosts of Acquisitions Anonymous and the recent owner of a large commercial roofing company in South Carolina. Roofers who partner heavily with new home builders are slightly less “hot” at the moment as people wait to see what happens to the economy. 

HVAC Install & Maintenance

HVAC is seeing a lot of M&A activity. There are a number of larger institutional investors rolling up HVAC companies, which is causing a lot of solopreneurs to look at buying and scaling an HVAC company to ultimately sell to private-equity. While HVAC checks the boxes of strong margins, low customer concentration and being recession resistant, many states require owners of HVAC businesses to have licenses.

Electrical Contractors

Similar to HVAC, the electrical industry is seeing aggressive roll-up strategies. The one consideration with electrical is the shortage of quality electricians. This means that businesses who already have strong crews are well positioned to sell at higher multiples.

Tree Services

Recent players in the tree services industry such as Kaustubh Deo and Kevin Halbert have drawn attention to the arborist industry. While these businesses often lack true recurring revenue, they do often see re-occurring revenue from customers need tree work done each season and commercial property owners looking for a long-term vendor for their trimming, hedging and treatment needs.

Landscaping

The landscaping industry is popular due to tailwinds of industry growth and the ability for a new owner to aggressively grow sales. Commercial landscaping operations are particularly popular. Mike Botkin is a well-known SMB operator who runs a commercial landscaping roll-up called Benchmark with a presence across the Southeast. 

Automotive Repair

In the automotive industry, there are two areas of consolidation: general auto repair and collision repair. General auto repair is seeing operators consolidate independent auto repair shops into trusted brands, such as Yinon Weiss’s Stree-Free Auto Care. Collision repair is seeing similar dynamics to the HVAC industry, where operators are rolling up collision repair shops to sell to larger PE players.

Pest Control

The pandemic saw an explosion in the pest control industry with many larger independent firms selling to private equity groups consolidating the industry. While the multiples are quite high, it’s still a very popular industry to buy in given how recurring and stable the revenue is. On the topic of recession resistant, there’s not much better than a business that fights pests.

A Comparison of Industries for a Business Acquisition in 2023

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.