Industry Selection Framework: A Scoring System for Search Fund Acquisitions
16 min read
The industry you choose determines roughly 70% of your search fund’s outcome before you ever sign a letter of intent. According to the 2024 Stanford Search Fund Study, which tracked 681 funds formed since 1984, healthcare and business services together accounted for half of all acquisitions, and tech-enabled services produced some of the highest IRRs. Yet most first-time searchers pick their industry based on gut feel rather than a structured framework. This article gives you a six-factor scoring model you can apply to any vertical, then benchmarks five specific industries against it so you can prioritize your search with real data instead of intuition.
Why Industry Selection Outweighs Deal Selection
The 2024 Stanford study reported an aggregate pre-tax IRR of 35.1% and a 4.5x return on invested capital across all search funds through December 2023. But those returns were not evenly distributed. Nearly 7 in 10 acquired companies generated positive returns, meaning roughly 30% did not, and industry mismatch was a recurring factor in underperformance. The IESE 2024 International Search Fund study highlighted similar patterns outside North America: funds that targeted fragmented, service-oriented industries with recurring revenue consistently outperformed those in cyclical or capital-heavy sectors.
Choosing the wrong industry creates problems that even excellent operators cannot fix: thin adjusted EBITDA margins leave no room for debt service, low fragmentation means fewer targets and higher multiples, and heavy regulation can paralyze a first-time CEO. A structured scoring framework forces you to confront these constraints before you invest 18 months searching.
The Six-Factor Industry Scoring Framework
Score each factor on a 1-5 scale (1 = worst, 5 = best). A maximum score is 30. Industries scoring 22 or above are strong candidates; 15-21 require a specific thesis to justify; below 15, walk away.
Factor 1: Market Fragmentation (Weight: High)
Fragmented markets mean more acquisition targets, less buyer competition, and clearer roll-up paths. The U.S. HVAC services market, for example, has thousands of independent contractors in every state, with the top five players, Johnson Controls, Carrier, Trane Technologies, Comfort Systems USA, and EMCOR Group, holding only about 35% combined market share according to PKF O’Connor Davies’ 2024 industry update. In pest control, the picture is similar: the top four firms (Rollins, Rentokil, Anticimex, ABC Home & Commercial) account for roughly 28% of industry sales per Capstone Partners’ 2024 sector update, leaving 78% of the market in private hands.
Score 5: No single player holds more than 5% share (HVAC residential, landscaping, pest control). Score 1: Top 5 firms control 50%+ of the market.
Factor 2: Recurring Revenue Percentage (Weight: High)
Recurring revenue compresses risk and inflates multiples. Buyers routinely pay 1-2x higher EBITDA multiples for businesses with contractual or subscription revenue versus project-based models. Rollins, the largest publicly traded pest control company, derives more than 80% of total revenue from recurring and ancillary services, according to its 2025 earnings report. Industry benchmarks from Breakwater M&A suggest that pest control companies with 65%+ recurring revenue build a solid valuation foundation, while those below 50% are penalized significantly.
Score 5: 80%+ contractual recurring revenue (pest control maintenance plans, managed IT, insurance renewals). Score 1: Purely project-based or transactional (general construction, event planning).
Factor 3: Owner-Operator Transition Ease (Weight: Medium-High)
Search fund CEOs are, by definition, first-time operators. Industries where the departing owner’s personal relationships or technical certifications are the business create enormous transition risk. The IESE Insight study on search fund failures identified “seller interference” and “team culture mismatch” as two of the top reasons acquisitions underperform. Industries with process-driven operations, documented SOPs, and mid-management layers transfer far more smoothly than those built around a single rainmaker.
Score 5: Systematic operations, minimal owner dependence, existing middle management (multi-location HVAC, property management). Score 1: Owner is the primary revenue generator (solo-practitioner consulting, owner-dentist practice with no associates).
Factor 4: Regulatory Barriers (Weight: Medium)
Regulation cuts both ways. Light regulation means easier entry but also more competition. Heavy regulation, HIPAA in healthcare, state dental board licensing, SEC compliance in financial services, creates moats but adds operational complexity that can overwhelm a first-time CEO. The sweet spot is moderate regulation: enough to deter casual entrants, not so much that compliance costs consume your margin. Pest control licensing, for instance, varies by state but is straightforward compared to opening a dental practice, where each state requires specific corporate practice of dentistry rules.
Score 5: Moderate barriers that protect incumbents without demanding specialist compliance teams. Score 1: Extremely heavy regulatory burden requiring dedicated legal or compliance staff.
Factor 5: Technology Disruption Risk (Weight: Medium)
Stable industries reward steady operators; disrupted industries punish slow adapters. Vertical SaaS can be both the disruptor and the disrupted, a B2B SaaS product serving a niche may have deep moats, but it also faces platform risk if a larger player (Salesforce, HubSpot) moves into the niche. By contrast, pest control and HVAC face minimal technology displacement risk: software can make these businesses more efficient (routing optimization, CRM), but no app replaces a technician crawling under a house. For more on tech-enabled acquisitions, see our guide to vertical SaaS acquisitions.
Score 5: Service delivered physically; technology enhances but cannot replace (HVAC, plumbing, pest control). Score 1: Core product easily replicated by larger tech platforms or AI.
Factor 6: EBITDA Multiples and Entry Valuation (Weight: Medium)
Your entry multiple directly determines your return ceiling. According to First Page Sage’s 2025 valuation reports, midsize HVAC companies currently average around 8x EBITDA (up 20% from pre-pandemic levels). Residential pest control companies in the $5-10M EBITDA range trade at 8.3x. Dental practices range widely: add-on acquisitions at 5-8x EBITDA, while premium multi-location platforms command 9-12x per Large Practice Sales’ 2024 analysis. Property management firms are cheaper at 3.8-4.2x EBITDA on average, according to Peak Business Valuation. Small SaaS businesses ($1-5M ARR) trade at 3-5x revenue for low-growth and 7-10x revenue for high-growth, per Breakwater M&A’s 2026 report.
Score 5: Entry multiples of 3-5x EBITDA with clear paths to exit at 7-10x (property management, niche services). Score 1: Entry above 10x EBITDA with limited multiple expansion opportunity.
Scoring Five Industries: HVAC, Pest Control, Dental, SaaS, and Property Management
Below is a side-by-side application of the six-factor framework. Each score reflects the data cited above, not subjective opinion. Use this as a starting template, then adjust weights based on your own risk tolerance, operating background, and target business size.
| Factor | HVAC | Pest Control | Dental | SaaS | Property Mgmt |
|---|---|---|---|---|---|
| Fragmentation | 5 | 5 | 4 | 4 | 5 |
| Recurring Revenue | 3 | 5 | 4 | 5 | 5 |
| Owner Transition Ease | 4 | 4 | 2 | 3 | 4 |
| Regulatory Barriers | 4 | 4 | 2 | 4 | 4 |
| Tech Disruption Risk | 5 | 5 | 4 | 2 | 4 |
| Entry Valuation | 3 | 3 | 3 | 3 | 5 |
| Total (out of 30) | 24 | 26 | 19 | 21 | 27 |
Industry-by-Industry Breakdown
HVAC (Score: 24/30)
HVAC is a proven search fund vertical with strong fragmentation and minimal disruption risk. The U.S. HVAC services market features thousands of independent contractors per state, and residential all-purpose companies command the highest multiples at 6.3-10.8x EBITDA per First Page Sage’s Q1 2025 data. The weakness is recurring revenue: while maintenance contracts are growing, many HVAC businesses still rely on break-fix and installation revenue, which is inherently lumpy. The best acquisition targets have already built a service-agreement base covering 40%+ of revenue. Baby boomer owners (average age 58+) create a deep pool of motivated sellers, and PE-backed platforms like Apex Service Partners and Wrench Group provide clear exit paths. For a detailed playbook, see our guide to recurring revenue businesses.
Pest Control (Score: 26/30)
Pest control is one of the strongest verticals for acquisition entrepreneurs. Rollins (parent of Orkin) derives 80%+ of revenue from recurring services, and the broader industry projects an 8.8% CAGR through the mid-2020s with a path to exceeding $15 billion in U.S. revenue by 2030, per Capstone Partners. Residential companies with strong contract bases trade at 8.3x EBITDA in the $5-10M range, while smaller firms ($500K-1M EBITDA) can be acquired at 5.7x, a significant arbitrage opportunity for a roll-up strategy. Customer retention rates for top performers hit 85%+ on the residential side and 88-90% commercial, per industry benchmarks. State licensing requirements are manageable (typically a certified applicator on staff), and the service is inherently recession-resistant: pests do not disappear during downturns.
Dental Practices (Score: 19/30)
Dental is attractive on paper, recurring patient visits, aging practitioners (33% of dentist-owners plan to retire within six years per the ADA), and proven DSO roll-up models. But the challenges are significant for a search fund operator. Only about 16-22% of U.S. dentists are currently affiliated with a DSO, meaning the market is fragmented but also heavily regulated at the state level through corporate practice of dentistry rules. Owner transition is the biggest hurdle: solo-practitioner dental offices derive the majority of their revenue from the owner-dentist’s clinical work, and patients often leave when the dentist does. Premium multi-location platforms can command 9-12x EBITDA, but add-ons are more reasonably priced at 5-8x. Unless you have healthcare operating experience or plan to hire an experienced integrator, dental scores below the threshold for most first-time searchers.
Vertical SaaS (Score: 21/30)
The 2024 Stanford study noted that software companies represented roughly 22% of all search fund acquisitions, making it the third-most-targeted sector. Vertical SaaS offers high recurring revenue (typically 90%+ for subscription models) and excellent margins (often 20-40% EBITDA for mature products). The challenge is twofold: entry valuations are steep (low-growth SaaS at $1-5M ARR trades at 3-5x revenue, which translates to 15-25x EBITDA for a 20%-margin business), and technology disruption risk is real. A niche product serving, say, yoga studios or dental labs may have strong retention today but faces platform risk if a horizontal player enters the niche. Searchers targeting SaaS should bring technical fluency and focus on products with high switching costs and deep workflow integration. For more on this vertical, see our vertical SaaS acquisition guide.
Property Management (Score: 27/30)
Property management is arguably the most underappreciated search fund vertical. Entry multiples are the lowest of any service business at 3.8-4.2x EBITDA on average, per Peak Business Valuation, while revenue is almost entirely recurring (monthly management fees, lease renewals, ancillary service charges). The industry is deeply fragmented, with thousands of small operators managing 100-500 doors. Technology enhances but does not replace the service, property management software (AppFolio, Buildium) improves efficiency, but tenants still need a person to call when a pipe bursts. The primary risk is margin: property management companies often operate on 15-25% EBITDA margins, and client churn can spike if a key landlord sells their portfolio. The opportunity lies in building density within a metro, adding ancillary services (maintenance coordination, tenant screening), and selling to a regional consolidator at 5-7x. For a deeper dive, see our property management acquisition playbook.
How to Customize the Framework for Your Search
The six-factor model is a starting point, not a final verdict. Adjust it based on three personal variables:
- Your operating background. A searcher with 5 years at a SaaS company should weight technology disruption risk lower for software targets because they can manage that risk. A former management consultant with no industry expertise should weight owner-transition ease higher.
- Your financing strategy. If you plan to use SBA 7(a) loans, you need to target industries with stable cash flows and tangible assets that satisfy lender requirements. SBA financing effectively caps your entry multiple at 4-6x EBITDA for most service businesses, which rules out premium SaaS and dental platform deals but aligns well with HVAC, pest control, and property management.
- Your exit timeline. If you plan a 5-7 year hold with a roll-up strategy, industries with active PE platforms (HVAC, pest control, dental DSOs, MSPs) provide clearer exit paths. If you plan to hold indefinitely, margin and cash-flow stability matter more than exit optionality.
The Stanford Data: What Actually Produces the Best Returns
While the 2024 Stanford study does not publish IRR by industry in granular detail, several patterns emerge from the aggregate data across 681 funds:
- Healthcare and business services have accounted for 50% of all acquisitions since 2014, signaling that experienced searchers and their investors consistently view these sectors as the highest-probability targets.
- Tech-enabled services (a category that includes vertical SaaS, MSPs, and software-augmented service businesses) have produced some of the highest IRRs, though with wider variance, the upside is large, but so is the downside.
- The 2017-2020 cohort has exceeded 50% IRR after 44% of funds in that group have exited, suggesting that the industries targeted during that period (which skewed toward services and technology) were particularly well-chosen.
- The median purchase price declined to $14.4 million in the 2024 study, indicating a shift toward smaller, more affordable targets, exactly the size range where fragmented service industries offer the deepest deal flow.
The takeaway is not that one industry guarantees success. It is that industries scoring well on fragmentation, recurring revenue, and transition ease produce the most consistent positive outcomes. For a broader perspective on the evolution of the asset class, see our history of search funds.
Applying the Framework: A Step-by-Step Process
- List 8-12 candidate industries based on your background, geographic focus, and deal-size target. Cast a wide net initially.
- Score each industry against the six factors using public data: IBISWorld for fragmentation, industry association reports for recurring revenue percentages, First Page Sage or BizBuySell for current multiples.
- Eliminate anything below 15. Industries that score poorly on multiple factors will drain your search time without producing viable deals.
- Deep-dive the top 3. Conduct financial due diligence on the industry itself: interview 5-10 operators, attend an industry trade show, talk to brokers who specialize in the space.
- Commit to 1-2 industries for your active search. Developing true industry expertise, knowing the metrics, the players, and the lingo, is what generates proprietary deal flow and differentiates you from other buyers.
Frequently Asked Questions
Should I focus on one industry or search across multiple verticals?
Focused searchers find better deals. The Hadley Capital team has noted that developing industry expertise helps in two domains: quickly evaluating acquisition candidates and differentiating yourself in competitive processes. That said, most successful searchers narrow from 2-3 industries to one over the first 6 months of their search, rather than committing on day one. Start with your top-scoring industries and let early deal flow and operator conversations guide your final commitment.
What if a high-scoring industry has too much PE competition?
PE activity is a double-edged sword. In pest control, for example, Rollins, Rentokil, and Anticimex have driven up platform-level valuations, but they have also created a predictable exit market for smaller operators who build to $2-5M EBITDA. The key is to buy at the small end (sub-$2M EBITDA) where PE firms rarely compete directly, then build to a size that attracts their attention. Search funds that acquire at 5-6x and sell to a PE platform at 8-10x capture significant multiple arbitrage. For sourcing strategies that avoid head-to-head PE competition, see our guide to working with business brokers.
How much does geography matter relative to industry selection?
Geography is the second filter after industry. A pest control company in Phoenix operates very differently from one in Minneapolis (seasonality, pest types, competitive density). Within your chosen industry, focus on metro areas with population growth, limited seasonal disruption, and a healthy density of small operators. The 2024 Stanford study found a record 94 core search funds launched in 2023, which means geographic concentration is increasing in popular markets like Texas, Florida, and the Southeast. Less saturated geographies can offer better deal terms even in competitive industries.
Can this framework be applied to international search funds?
Yes, with adjustments. The IESE 2024 International Search Fund study confirmed that fragmentation and recurring revenue remain the two strongest predictors of positive outcomes across geographies. However, regulatory barriers vary enormously by country (labor law in France, corporate structure requirements in Brazil, licensing in the UK), so Factor 4 needs to be scored against local conditions. Entry multiples also differ: service businesses in Southern Europe and Latin America often trade at 3-5x EBITDA versus 5-8x in the U.S. for comparable quality, which can offset higher operational complexity.
What is the single most important factor in the framework?
If forced to choose one factor, recurring revenue percentage is the strongest predictor of both acquisition success and exit value. A business with 80%+ recurring revenue is easier to finance (lenders love predictable cash flow), easier to operate (you are not starting from zero revenue each month), and easier to sell (buyers pay premium multiples). When the 2024 Stanford study highlights that healthcare and business services dominate search fund acquisitions, the common thread is contractual or habitual recurring relationships. Start your scoring there, and let the other factors serve as tiebreakers.