Post 15: The importance of game selection

After a lengthy hiatus, I am happy to be writing again! I started pulling together a content calendar (it’s 40% full) and I’m psyched to share what I am thinking about these days. I recently caught up with a friend from college. He asked me what I have been doing in the search fund space, given he had read some of my pieces - eventually the discussion turned to the importance of “Game selection”. I have been stewing on the concept ever since and my current conclusion is I think Game selection is (on average) the greatest predictor of business outcomes, be it in search funds, building a tech platform or in investing!

Introduction

In the world of search funds and indeed, other modalities of business-building, such as tech or investing, choosing the right industry—often referred to as "game selection"—is maybe the most important driver of success. Much like a skilled fisherman must seek out the right pond teeming with high quality fish in order to maximize her catch, an astute business-builder must identify industries with attractive characteristics in order to “have a shot” at demonstrating the value of her skills. Selecting the right industry segment can mean the difference between abjectly struggling against long-term headwinds or happily riding the tailwinds of an expanding market.

In this piece, I explore industry attractiveness for business acquirers, focusing on market stability, growth potential, access to capital, business predictability, and operational efficiencies, however the concepts can similarly be applied in tech and in investing

Fishing in the Right Ponds: Selecting the Right Industry

1. Industry Growth and Market Expansion

The most obvious contributor in game selection is targeting an industry with strong, sustained growth momentum. Investors are less likely to identify/persecute execution errors when the underlying market is expanding, as market growth lifts all boats. A shrinking or stagnant market, exposes the operator to meaningful downside risk, especially if acquisition multiples are high.

Indicators of a promising industry include:

• A strong five-year compound annual growth rate (CAGR) in the mid-to-high single digits or greater.

• Long term tailwinds such as demographic shifts, technological advancements, or regulatory changes favoring industry expansion.

• Low risk of obsolescence from disruptive innovations.

2. Large TAM and Fragmented Markets

Industries with a large (and ideally growing) total addressable market (TAM) provide ample room for growth and multiple acquisition opportunities. Additionally, fragmented industries—where no single player holds a dominant market share—are prime for consolidation once the core business has been stabilized. These sectors present an opportunity to acquire multiple smaller firms, integrate operations, and improve efficiencies through economies of scale.

Industries that often exhibit these characteristics include:

• Home services (e.g., HVAC, plumbing, electrical)

• Healthcare services (e.g., specialty clinics, home health, medical testing)

• B2B services (e.g., managed IT services, logistics, security services)

• Niche manufacturing (e.g., precision components, contract manufacturing)

Investors have jumped onto opportunities in these markets the last several years, which has driven multiple expansion for potential investment platforms in these markets and more competitive sale processes for companies.

Location, Location, Location: Market Stability and Currency Strength

1. Operating in Economically Stable Countries

Whilst nationality isn’t chosen on a menu of options at birth, the choice of geography plays a significant role in business success. While some industries may look attractive on paper, macroeconomic instability can introduce risks, which may render even the most attractive businesses uninvestable. For example, operating in countries with volatile currencies or unpredictable regulatory environments can erode investor confidence, drive difficulty in transacting and complicate long-term planning.

When selecting an industry, consider targeting businesses in countries with:

• Strong, stable currencies (e.g., USD, EUR, GBP, CAD, AUD)

• Predictable legal and regulatory environments

• Well-developed banking and financial infrastructure

• Access to talent and skilled labor pools

2. Access to Favorable Lending Markets

Financing is often the lifeblood of a search fund-backed or SMB acquisition. Banks and lenders have preferences regarding which industries they are comfortable financing. A prudent approach may be avoiding industries with significant barriers to funding, such as cannabis, gambling, or highly regulated sectors undergoing deregulation, as they may lack access to traditional credit facilities.

Instead, target industries where lenders are:

• Familiar with the business model and risk profile.

• Comfortable underwriting loans based on stable cash flows and tangible assets.

• Willing to offer favorable debt terms (e.g., low interest rates, long amortization periods, high loan-to-value ratios).

Financial and Operational Considerations

1. Recurring Revenue and Low Churn

A crucial factor in selecting the right industry is ensuring businesses generate predictable, recurring revenue. High customer churn rates create operational volatility and necessitate constant reinvestment in customer acquisition/marketing.

Businesses with high revenue stickiness include:

• Subscription-based services (e.g., SaaS, managed IT services, security monitoring)

• Contract-based services (e.g., facility maintenance, outsourced HR, logistics)

• Essential healthcare services (e.g., dialysis centers, diagnostic labs)

• Component-driven businesses (e.g., aircraft and machine componentry)

Conversely, try to avoid industries heavily dependent on one-time transactions or subject to extreme seasonality.

2. High Cash Flow Conversion and Low Capital Intensity

An ideal industry should exhibit strong conversion of earnings into cash flow. Businesses that require significant reinvestment in working capital, inventory, or capital expenditures (CapEx) tend to be less attractive businesses.

Prefer industries where:

• A large portion of revenue is converted into cash flow (low receivables, minimal bad debt risk).

• There is minimal need for continuous reinvestment in equipment or inventory.

• The business can scale without excessive capital requirements.

Industries that often meet these criteria include:

• Professional services (e.g., legal, accounting, consulting)

• Asset-light B2B services (e.g., digital marketing, software development)

• Low-overhead healthcare services (e.g., therapy clinics, medical billing companies)

Avoiding Industries with High Risk and Low Predictability

1. Seasonality and Weather Exposure

Industries with significant seasonality or exposure to weather events introduce unpredictability into cash flows. Businesses reliant on peak-season revenue must weather off-season downturns, making them more vulnerable to financial strain.

For example, businesses in:

• Tourism and hospitality (cyclical demand, seasonal dependence)

• Agriculture (weather-dependent yields, commodity price fluctuations)

• Outdoor construction (delays due to weather conditions)

While financing partners who specialize in these categories may transact, acquisition multiples for these businesses tend to be lower than businesses without similar cyclical variability in performance.

2. Key Person and End-Market Risk

If you look on any business broker’s website, one of the most common business sale categories is businesses with key man risk (e.g., an architect with 35 years of relationships selling her business, an engineer specializing in a narrow vertical selling their business to retire). Industries with high key-person dependency or significant customer concentration introduce additional risks. If a business’s success relies on a single individual (e.g., a rainmaking founder, a highly specialized technician), transitioning ownership becomes much more challenging. Likewise, if a business derives a large portion of revenue from one or two major customers, the loss of a single contract could have catastrophic consequences.

Look for businesses with:

• Broad customer diversification to mitigate concentration risk.

• Institutionalized processes that do not rely on a single individual.

• A resilient and diverse end market that does not rely on a single economic sector.

Conclusion

The more I have stewed on this subject, the more convinced I am that game selection is the cornerstone of success for any business-person. Choosing the right industry increase the probability of sustainable revenue growth, operational stability, and favorable financing options. Targeting industries with strong growth trends, large TAMs, high recurring revenue, and low capital intensity, can increase the potential for long-term value creation. A question for you as you consider your next venture - if you had to make a decision about where to spend the next 30 years, why wouldn’t you optimize for the path with the highest chance of success?

Parting Thoughts

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Until next time…Keep building!