The number one reason people join the Acquisition Lab is because they want to decrease their risk in buying a business. 

The questions come in various forms: 

What are the safest businesses to buy?

When’s the right time to buy? 

What industry should I focus on? 

But ultimately, they’re all asking the same thing: how can they decrease their risk in buying a business? 

For many, there’s a strong draw to becoming an acquisition entrepreneur because you get to run your own business and invest in a reliable and appreciable asset, but the harsh reality is that many startups fail. Over 60% of businesses fail within the first ten years.

Buyers are rightfully cautious as they go about their search. However, buying a business, if done right, solves the issue of the startup failure. You get to jump ahead to the more steady and reliable phase of business ownership where a business has proven product-market fit, strong financials, and established infrastructure to support it. 

Top Safest Business Types

Today I want to discuss the nine safest business types and, as a bonus, what else you can do to lower your risk during the acquisition process. By finding these elements in your acquisition, you’ll be able to have flexibility as the CEO as you learn how to operate a business, as the tides should be working in your favor.

1. Essential Services

During the pandemic, over 700,000 establishments shut down during the second quarter of 2020, leading to a sudden awareness of (and disagreement with) the term “essential services.” Regardless of what types of business fall under the definition of being necessary for public health and safety, the reality is if you own a business that provides essential services, your business is more resilient, if not immune, to worldwide pandemics and economic downturns. 

Here are some examples of essential services businesses:

• Media outlets
• Internet service provides
• Financial services
• Healthcare services
• Personal services (child care, funeral services, laundromats, shipping services)
• Public services
• Home repair
• Retail stores that sell products necessary for health and safety
• Food supply chain
• Transportation 

2. Recurring Revenue Models

Businesses with recurring revenue models have the benefits of predictable income, financial stability, and brand loyalty. Monthly or annual recurring revenue (MRR and ARR respectively) allows you to forecast how much revenue a business is going to make in the future. Additionally, MRR/ARR indicates that a business has product-market fit. Incorporating recurring revenue, especially contractual, can increase a company’s valuation by up to 8 times.

Source: SaaS CFO

According to Stanford’s 2022 Search Fund Study, “recurring revenue was more common in recent search-acquired companies, with 66% of companies purchased within the last two years reporting high recurring revenue as compared to 44% of companies acquired in 2018 and 2019.” 

It’s also important to note that churn (the number of customers that cancel their subscription) should be monitored and managed as well. The focus with recurring revenue becomes less about obtaining the customer (although very important) and more about long-term customer satisfaction. Churn should be limited to 25% per year or lower.

Some examples of businesses with recurring revenue models are:

• Software as a Service (SaaS) (e.g. Adobe suite)
• Membership businesses (e.g. mastermind group membership)
• Professional services (e.g. coaching and mentorship)
• Digital subscriptions (e.g. online courses, exclusive content)
• Physical subscription boxes (e.g. specialty food of the month club)
• Maintenance services (e.g. landscaping)
• Subscription-based e-commerce (e.g. Amazon’s Subscribe and Save)
• Mobile app subscriptions (e.g. health and fitness app)

3. Growing Markets

While no investment is entirely risk-free, purchasing businesses within growing markets can offer buyers a more promising outlook for future growth and success. Businesses operating in a tailwind are safer because there’s increased demand for products or services, room for business expansion, less competition than with established industries, and typically there are rapid changes and innovation happening in a growing industry. In fact, you may have a chance at securing funding in a market that is poised for growth.

That said, you don’t need to find an industry with insane overnight growth, as it might turn out to be a bubble that’ll inevitably pop. Simply avoid contracting industries and look for industries that may be fragmented and in clear need of a face lift. 

The great thing about growing markets is that they provide opportunities for sustained profitability and assurance of long-term viability. 

According to IBISWorld, these are the some of the fastest growing industries in the US in 2024:

• Fruit and nut farming
• Solar power
• Online gambling services
• 3D printing and rapid prototyping services 
• Digital advertising agencies

Note that each of these may have their own additional considerations (i.e. government policies for “solar” and laws for “gambling”), but the point is that anything with an industry tailwind deserves your consideration.

4. Turnkey Operations

Just like house hunting for that perfect, turnkey house, there are also turnkey businesses, or in other words, all you have to do is “turn the key,” and it’s ready for operation. Opting for a turnkey business minimizes the risk of acquisition, reduces or eliminates any startup time, hands you an existing customer base, and provides you with cash flow from day one. 

The best turnkey operations are ones that are simple to understand and don’t require complex training to properly run, require minimal employees, and have established standard operating procedures (SOPs) and automation. 

Source: Cash Flow Diaries

Some examples of turnkey acquisitions are:

• Turnkey rental properties: If you’re looking to make money from rental properties, turnkey rentals are ready for rent immediately. All property management and maintenance services are already included from day one. 
• Successful Amazon FBA business: Acquiring an existing Amazon FBA (Fulfillment by Amazon) business allows you to kickstart operations immediately upon ownership transfer. Established FBA businesses come with existing processes and systems, and you can also leverage the automation tools on the Amazon seller central platform to streamline operations and minimize time spent in the business.
• Service industry business: Service-based businesses, such as landscaping or painting enterprises, are great turnkey businesses. You don’t have to worry about buying equipment like you would if you started a service business from scratch, as the equipment and other assets are included in your purchase.

5. Minimal Concentration

Businesses with low supplier concentration, customer concentration, and key man risk are more transferable and scalable than businesses overly dependent on a single supplier source, client, or employee. 

Low supplier concentration means that the business does not rely heavily on a single supplier or a small group of suppliers for its operations, reducing the risk of supply chain disruptions. Diversifying suppliers spreads risk and ensures continuity of operations, making the business more resilient to external shocks.

A lack of customer concentration means that the business serves a diverse customer base, spreading its revenue across multiple clients. This diversification reduces the risk of revenue loss associated with losing a single large customer or a few key clients. Some search funds aim for a customer concentration of 15% or lower per customer served.

Key man risk refers to the risk associated with overly depending on key personnel within a business, whose absence or departure could significantly impact operations and profitability. This can refer to a specific employee, a manager for example, or even the owner him or herself, as is the case in many personal brands. (Hint: SOPs can help alleviate this risk.)

Businesses with minimal concentration across the board have a more stable supply chain and operational processes that aren’t dependent on one or two individuals in the company, which ultimately allows the buyer to maintain, grow, and expand the business. 

6. Financial Performance

While past performance doesn’t guarantee future success, acquiring a business with a positive financial trajectory can lower risks. Look for businesses that have been experiencing growth in revenue and profitability, indicating a healthy and sustainable operation. That said, you want to find a good medium between a business that has shown promising growth and one that has had exponential growth for several years – the best time for a buyer to buy is when the business demonstrates growth but isn’t overvalued, yet.

Some other factors to look at when analyzing the financials of a listing are an EBITDA margin of above 15% and a business that has low maintenance capital expenditure (CapEx). A business has expenses to maintain the business and expenses that help grow the business – you want to make sure the expenses required to maintain day-to-day operations still allow the business to be profitable. If a company’s maintenance CapEx is relatively high, the company will be low in free cash flow that’s needed to repay debt and grow the business. 

7. Defensive Moats

Businesses with defensive moats, such as patents, brand recognition, economies of scale, or pricing power, can effectively fend off competition and maintain profitability. 

What is a moat? A moat is an element of the business that allows it to avoid or out-earn its competition. These competitive advantages provide a level of protection against market disruptions and industry changes. 

Source: Toptal

Defensive moats create a higher barrier to entry for newcomers in the industry, making it difficult for competitors to enter the market and challenge the business’s position. Having less competitive pressure from rivals can allow a business to maintain higher profit margins, market share, and pricing power compared to its competitors. An example is when Apple first rolled out the iPhone — there were no other smartphones on the market at the time, which gave Apple total pricing power.

Defensive moats can also lead to higher customer loyalty and retention, as customers are inclined to stick with a business that offers unique products (of superior quality orr with exceptional customer service) that they can’t obtain elsewhere.

Examples of defensive moats to keep an eye out for include:

• Network effect: the effect that happens when the value of a product improves for all users as more users join a platform, even for the existing user base. 
• Switching costs: attributes of a product or service that make it cost-prohibitive for the customer to switch to a competitor or alternative.
• Brand recognition: When customers identify themselves with a certain brand, they become advocates for that brand and it’s difficult to sway their loyalty otherwise. 

8. Low Fluctuations

A predictable business is a safe business, and a predictable business is one with as few unpredictabilities as possible. Some common fluctuations you might find in industries are cyclicality and seasonality, regulatory risk, technological disruptions, and environmental impacts.  

A business with high cyclicality and seasonality only sells products or services at certain points throughout the year. Businesses with low cyclicality and seasonality experience consistent demand for their products or services throughout the year, which allows a buyer to readily forecast future revenue, making the business more reliable than a seasonal business.

Regulatory risk is the potential of a change to the laws or regulations hurting a business by affecting that business, sector, or market. An example of regulatory risk is in 2021, when Apple changed its policy on tracking transparency in its iOS 14.5 updates. These changes significantly impacted sales of many e-commerce businesses advertising on the platform. 

Technology risk is the potential for a technological failure to disrupt a business. Examples of a technology disruption are cyber attacks, service outages, and outdated equipment. One example is in 2023, when a cyber attack at Clorox cost $356 million in damages.

Environmental risk refers to a risk where material or environmental factors can affect the planned use of a given location, e.g. construction sites or areas prone to natural disasters. When Hurricane Ian hit Florida in 2022, power outages forced a number of businesses to shut down for extended periods, leading to significant financial losses and inability to recover even when power was restored. 

Clearly, a business that is immune from these risks is one that enjoys more consistent revenue streams, reduced exposure to external factors, and lower operational costs (e.g. repairs or licensure). 

9. Seller’s Outlook

Although this isn’t a specific “type” of business you can find on the market, it’s important to find a seller with whom you have a positive relationship with throughout the acquisition process. The business itself is important, but the relationship you have with the seller carries more weight than you might think.

According to Stanford’s 2022 Search Fund Study, most searchers had positive relationships with their sellers and considered them to be honest and ethical. In fact, 96% reported that they had a positive relationship post-acquisition.

Source: Insperity

Why is this important? 

A positive relationship between the buyer and seller reflects a level of trust and respect, which facilitates smoother negotiations throughout the process. When buyers have confidence in the sellers’ honesty and ethics, they are more likely to accurately assess the business’s financial and operational health, reduce the risk of undisclosed issues or surprises post-acquisition, and give the sellers the benefit of the doubt if issues arise along the way. 

Additionally, maintaining a positive relationship post-acquisition can be advantageous for both parties. Sellers are more inclined to provide ongoing transition assistance to ensure the business’s success under the new owner. This support can help mitigate risks associated with leadership transitions and operational changes and ensure stability in the long run. 

Ways to Mitigate Risk in the Acquisition Process

While it’s important to identify safe businesses to purchase, minimizing your risk doesn’t end with choosing the right opportunity. There are a few additional things you’ll want to make sure you do to mitigate your risk even further in your acquisition:

• Conduct a Proper Initial Analysis
  
  As we teach in the Acquisition Lab, your initial analysis should include a review of the business’s financial statements, competitive landscape, and industry growth potential. You can utilize Porter’s Five Forces and a SWOT analysis so you can start to gauge the risk of the acquisition. In the initial analysis, you should be able to identify potential risks or red flags that might require additional investigation. 
  
  
• Hire a Team
  
  Hiring a team of experts to assist with the acquisition process, from legal and financial advisors to industry specialists, can provide valuable insights and mitigate risks. A team can help ensure a smooth and successful acquisition, from helping you navigate due diligence to negotiating terms in the APA. By leveraging the knowledge and skills of a qualified team, you can minimize risks and maximize the success of your acquisition. 
  
  
• Don’t Overspend
  
  While it’s tempting to buy a bigger business for bigger cash flow, excessive debt can jeopardize the long-term sustainability of the business. Overspending can strain your resources, limit flexibility, and create undue stress if you find yourself in a pinch. Carefully evaluate the business’s valuation to ensure the purchase price aligns with the business’s intrinsic value and growth potential. You can also consider alternative financing options, negotiate favorable terms, and seek expert guidance to optimize the deal structure. 
  
  
• Have a Clear Vision for How You Will Run the Company
  
  Like I always say, YOU are the defining factor in a business’s success. Having a clear vision for how you plan to run and grow the business is crucial, as you need to know where you’re ultimately headed. 

Beauty is in the Eye of the Beholder

You can use all the analyses models, hire the world’s best due diligence team, and select the “perfect” business, but, ultimately, the safest business to purchase aligns with your interests, skills, and long-term goals. 

As the driving force behind the business’s success, your passion and vision will determine its ability to thrive. Buying the “right” business isn’t just about minimizing risks—it’s about nurturing and growing a venture that you’ll be committed to for years to come. 

Ready to acquire a business in the next 12 months? The Acquisition Lab is your first stop. Reach out to us today and get on the fast track to becoming an acquisition entrepreneur.