Choose the terrain before the fight starts
According to the Stanford Graduate School of Business 2024 Search Fund Study, healthcare and B2B services each account for roughly 25% of all search fund acquisitions tracked since 2014. Software and technology follow at 22%. Tech-enabled services at 16%.
Those numbers are not an accident. They reflect what happens when operators apply consistent acquisition criteria across thousands of targets over decades. The sectors that cluster at the top share specific structural characteristics. The ones near the bottom share a different set.
Green Berets spend more time selecting the mission terrain than executing it. Wrong terrain, wrong outcome regardless of how well you execute. Search funds work the same way. Your sector choice sets the ceiling on what you can build.
What makes an industry search fund-ready
The sector matters less than the business characteristics within it. But industries concentrate those characteristics in predictable ways. Industries that consistently produce good acquisition candidates share a recognizable profile.
The characteristics that produce successful acquisitions:
- Recurring revenue. Subscription contracts, maintenance agreements, retainer relationships. Predictable cash flow lets you service acquisition debt and invest in growth at the same time.
- Low customer concentration. No single customer should represent more than 15% of revenue. When the biggest customer leaves, the business needs to survive that.
- Owner-operator dependency. The seller is involved in everything. That is both a risk and an opportunity. A new operator who installs systems and builds a management layer can capture significant value from day one.
- Fragmented competitive landscape. Dozens or hundreds of small competitors, none dominant. Room to grow through both organic and acquisition paths without running into a 800-pound gorilla in year two.
- Defensible margins. B2B services typically run 15-40% EBITDA margins. That range supports deal economics at 5-8x multiples without requiring financial engineering to make the numbers work.
The Stanford study found the median acquisition carried $2.2 million in EBITDA, a 27% EBITDA margin, and 25% revenue growth. Purchase price averaged $14.4 million at 7.0x EBITDA. Industries that produce businesses with those characteristics get the deal flow. Others do not.
The sectors that dominate ETA
Healthcare services: 25% of acquisitions
Not hospital systems. Not Big Pharma. The search fund healthcare sweet spot is smaller: specialty practices, dental service organizations, behavioral health, home health agencies, physical therapy groups.
These businesses have sticky revenue. Insurance reimbursements create predictability. Aging demographics drive demand. The market remains deeply fragmented. Most of these businesses are still run by a founding practitioner who built a good practice but never built a scalable company around it.
The operator's job is to install the company around the practice. That is a management problem, not a clinical one. Systems, hiring, reporting, retention. Standard operational work with a high ceiling.
B2B services: 25% of acquisitions
Commercial cleaning, pest control, HVAC, landscaping, security monitoring, IT managed services, facilities management. B2B services businesses run on contract-based revenue, low capital intensity, and pricing power from switching costs.
These businesses are not glamorous. That is the point. A commercial cleaning company under long-term government or hospital contracts produces stable, predictable cash flow. Operators who build systems around the existing customer base and then layer in tuck-under acquisitions can compound returns substantially.
The Stanford data shows B2B services producing strong exit multiples. Private equity roll-up platforms pay well for businesses with documented processes and diversified customer bases. The exit path is clear before you buy.
Software and technology: 22% of acquisitions
Specifically: vertical SaaS and legacy software with captive user bases. A payroll system used by 200 dental practices for 12 years. Compliance software built for a single regulated industry. Property management tools entrenched in regional portfolios.
High switching costs. Near-100% gross margins. Annual recurring revenue that survives most economic cycles. The catch: entry multiples run higher, often 8-10x EBITDA or more for healthy SaaS books. That compresses returns unless you can grow revenue post-acquisition.
Operators with technology backgrounds move faster in this sector. Those without should build a strong technology partnership early in the search process, not after the LOI is signed.
Tech-enabled services: 16% of acquisitions
The middle ground between services and software. A staffing firm built on proprietary matching algorithms. A testing lab running on custom software. Logistics operations where technology differentiates the margin.
These businesses often trade at service multiples while delivering software-style recurring revenue. The valuation gap is a search fund opportunity. The risk is that the technology advantage erodes faster than a pure software moat would. Diligence needs to go deep on how defensible the tech actually is before you pay a premium for it.
Sectors operators underestimate
Manufacturing gets avoided because it sounds capital-intensive and cyclical. Some of it is. But niche manufacturing businesses tied to specialized industrial applications often carry 20-year customer relationships, low customer concentration, and pricing power built on certification requirements that competitors cannot easily replicate.
A manufacturer of specialty components for the oil and gas sector is not glamorous. It may produce 30% EBITDA margins with a customer base that cannot easily switch suppliers without re-qualifying a new vendor. Those are strong acquisition characteristics regardless of the industry label attached to them.
The same logic applies to distribution businesses. High volume, thinner margins, but businesses with proprietary supplier relationships or exclusive territory agreements can be excellent targets at 3-5x EBITDA. The key is finding the ones with structural advantages competitors cannot replicate.
Sectors where search funds struggle
Consumer-facing businesses carry different risk profiles. Customer concentration is harder to measure. Brand dependency is harder to transfer. The founder's personal relationships may constitute the entire business value.
Restaurants, retail, and hospitality have structural characteristics that make debt-financed acquisitions risky. Revenue is transactional, not recurring. CapEx requirements are ongoing. Margins are thin. A bad quarter can threaten debt service.
Capital-intensive manufacturing at scale presents similar challenges. Heavy equipment, long production cycles, volatile input costs. Debt service from a leveraged acquisition competes directly with CapEx requirements. The math works against you from the start unless you are buying at a very deep discount.
How to use sector selection as a filter, not a fence
The top sectors tell you where to concentrate search activity. They are not a prohibition on everything outside the list.
A B2B services business in an underrepresented sector with 40% EBITDA margins, five-year customer contracts, and 15% revenue growth is worth pursuing. A software business with 60% annual churn is not, regardless of how well it fits the sector profile on paper.
The Stanford data shows the average searcher examined businesses across 4.8 different industries before acquiring. That pattern tells you two things: sector focus is real, and operators cross sectors when the underlying business characteristics align with acquisition criteria.
The mental model: start with industries that structurally produce good acquisition candidates. Spend the majority of search activity there. When you encounter an exceptional business outside those industries, evaluate it on its own merits against your criteria, not against the sector label.
What comes after sector selection
In 2023, 94 new search funds launched, the highest number ever recorded according to the Stanford study. The competitive pressure for acquisitions is rising. Operators who define their sectors early, build deep industry relationships, and develop sourcing advantages before the formal search window opens see more proprietary deal flow.
Sector selection is not a one-time decision. It is a commitment that shapes your outreach list, your industry relationships, your diligence framework, and your operating playbook before you ever make an offer.
The operators who produce 35.1% median IRR and 4.5x returns on investment, both figures from the Stanford data, are not discovering superior industries after the fact. They are selecting terrain deliberately before the fight starts, then executing against a clear operating thesis from day one.
When you have identified your target sectors, the next step is building a rigorous acquisition filter. Read our framework for search fund acquisition criteria to understand what separates targets worth pursuing from ones that will consume your time and produce nothing.
