The contrarian view on "boring" businesses
While everyone chases the next unicorn, we're building wealth by acquiring profitable service companies that most investors ignore. Not because we're risk-averse—because we've learned that sustainable returns come from businesses with predictable cash flows, defendable market positions, and rational sellers.
After analyzing 200+ acquisition opportunities across sectors, service companies consistently outperform manufacturing, retail, and tech businesses in both purchase multiples and post-acquisition returns. Here's why.
The financial advantages are undeniable
Asset-light models mean higher returns Service companies typically require minimal physical assets. A marketing agency's main assets walk out the door each night and (hopefully) return the next morning. This creates:
- Return on invested capital often exceeding 25%
- Lower maintenance capex requirements
- Easier geographic expansion without facility investments
- Higher terminal values when you exit
Recurring revenue is predictable wealth The best service businesses have subscription-like characteristics:
- IT managed services with 3-year contracts
- Payroll processing with high switching costs
- Professional services with retainer models
- Property management with long-term leases
This recurring revenue base makes financial projections actually meaningful, rather than the fantasy math common in tech startups.
Margins improve with scale and efficiency Unlike manufacturing businesses constrained by material costs, service companies can improve margins through:
- Process optimization and automation
- Strategic client mix improvements
- Premium pricing for specialized expertise
- Operational leverage as teams handle more clients
The behavioral advantages institutional investors miss
Emotional seller dynamics work in your favor Service business owners often have different motivations than manufacturing or tech entrepreneurs:
- Professional service founders want to protect their reputation and team
- Family-owned service companies prioritize legacy over maximum price
- Lifestyle business owners value certainty over gambling on earnouts
These emotional factors create negotiating leverage that purely financial buyers often miss.
Lower competition from institutional buyers Private equity largely ignores sub-$50M service businesses because:
- Deal sizes don't justify their fund structures
- No tangible assets to secure leverage against
- People-dependent models seem "risky" to financial engineers
- Harder to apply cookie-cutter value creation playbooks
This systematic neglect creates a market inefficiency we exploit.
Management teams typically stay post-acquisition Unlike tech companies where founders often leave post-sale, service business management teams usually remain because:
- The business depends on their relationships
- Professional reputation and client trust are at stake
- Stock upside and earnouts incentivize continued performance
- They often become equity partners in future growth
Sector-specific advantages we focus on
Professional services (accounting, legal, consulting)
- High barriers to entry (credentials, reputation)
- Client relationships spanning decades
- Predictable seasonal cash flows
- Limited technology disruption risk
Business services (payroll, property management, staffing)
- Essential services businesses can't eliminate
- High switching costs for established clients
- Regulatory compliance creates moats
- Geographic expansion opportunities
Healthcare services (admin, non-clinical support)
- Growing market with demographic tailwinds
- Relationship-dependent competitive advantages
- Recurring revenue from insurance processing
- Consolidation opportunities across regions
Why service companies vs. our other options
Manufacturing businesses:
- Capital intensive with ongoing capex requirements
- Commodity exposure and margin pressure
- Environmental and regulatory risks
- Harder to relocate or expand operations
Technology companies:
- Valuation multiples often irrational
- Platform disruption risks
- Talent retention challenges post-acquisition
- Winner-take-all dynamics create feast-or-famine outcomes
Retail businesses:
- Declining foot traffic and e-commerce pressure
- Location-dependent success factors
- Inventory management complications
- Consumer preference shifts too rapid to predict
The compounding advantage of focus
By specializing in service company acquisitions, we've developed:
Industry expertise that creates value
- Understanding key performance metrics unique to services
- Relationships with quality management candidates
- Operational improvement playbooks that actually work
- Ability to spot hidden value others miss
A growing network effect
- Service business owners refer other potential sellers
- Management teams move between companies in our portfolio
- Industry experts become advisors and deal sources
- Reputation builds within specific service niches
Predictable integration processes
- Standardized approaches to combining service teams
- Proven methods for client retention post-acquisition
- Established systems for cross-selling between portfolio companies
- Refined due diligence checklists for people-dependent businesses
What makes a service company acquisition-worthy
Non-negotiable criteria:
- Profitable for 3+ consecutive years
- Management team staying post-acquisition
- At least 40% recurring or repeat revenue
- defendable competitive position in local/niche market
- Growth opportunities without major capital investment
Behavioral indicators we prioritize:
- Owner approaching retirement but concerned about legacy
- Strong company culture and low employee turnover
- Long-term client relationships (5+ year average tenure)
- Untapped pricing power or service expansion potential
The reality check most investors ignore
Service businesses aren't without risks:
- Key person dependencies can kill value overnight
- Client concentration can create vulnerability
- Service quality subjective and hard to scale
- Economic downturns impact spending on "non-essential" services
But here's the thing: these risks are manageable with proper due diligence and behavioral analysis. The businesses we avoid (those with key person risk, client concentration, etc.) are usually obvious in advance.
Our track record speaks to the strategy
Portfolio performance over 3 years:
- Average acquisition multiple: 4.2x EBITDA
- Average annual return: 28%
- Zero complete losses (vs. 15% loss rate on tech investments)
- 85% of management teams stayed beyond initial earnout periods
The service company advantage compounds:
- Lower purchase multiples leave room for error
- Cash-generative nature funds growth without dilution
- Defensible market positions protect downside
- Multiple exit options (strategic sale, management buyout, dividend recaps)
This isn't about avoiding innovation or growth—it's about finding sustainable competitive advantages that don't depend on hoping you picked the next Google. Service companies with strong market positions and quality management teams compound wealth reliably.
While others chase unicorns, we're building a stable of profitable, growing service businesses that generate cash and create options. Sometimes the best innovation is applying proven investment principles to overlooked opportunities.
Next week: "How Founder Psychology Affects Service Company Valuations"