One of the most common questions I get from buyers is whether they should even consider a business in a declining industry.
With limited growth potential, shrinking customer demand, and outdated infrastructure found within a declining industry, you’d think I’d give an immediate “no” to this question, but that’s actually not the case.
In an attempt to mitigate risk, most buyers avoid declining sectors altogether, but there’s often opportunity hidden within these markets if you know where to look.
However, the answer isn’t a straightforward “yes,” either.
In this article, I’ll help you understand an industry’s life cycle, what each stage means, and how to recognize hidden value in declining industries – enabling you to capitalize on deals others might overlook.
With over 20 years of experience acquiring and investing in companies across various sectors, including those in decline, I’ve found that some of the best opportunities can lie in places you’d least expect.
Understanding Industry Life Cycle
When we look at any given industry, there’s a familiar pattern of expansion and contraction that they all experience over time.
Source: Corporate Finance Institute
Each industry follows a typical life cycle:
- Startup Phase: The industry begins to develop, finding its product-market fit.
- Growth Phase: Businesses experience rapid expansion.
- Maturity Phase: Growth slows as the market stabilizes.
- Decline Phase: Demand wanes as consumer preferences or technology evolve.
In some diagrams, like the one above, you’ll also see a “shake-out” phase, but this is simply the transition phase between the growth and maturity phases. In this phase, rapid growth slows and regulation catches up as the industry begins to mature. Weaker players are “shaken out” through failure or mergers with competitors.
Investors are very familiar with the life cycle stages. Where a business falls in the life cycle dictates a few things to investors, including the right time to invest in a business, valuation multiples, cash flow patterns, and potential for exiting down the road.
Venture capital often targets the growth phase, where growth is explosive and potential returns are high. Private equity, on the other hand, tends to favor mature industries where stability and cash flow are priorities. Additionally, with these companies, valuations are not overinflated by future projections, making them more worth it from an ROI standpoint.
We can see why the growth and maturity phases are most commonly targeted by investors:
Source: Morgan Stanley | Counterpoint Global Insights | Trading Stages in the Company Life Cycle
So with a negative return on invested capital (ROIC) for companies in the decline phase, is it still worth buying?
The short answer: Buying a business in a declining industry isn’t necessarily a bad idea, but you need to carefully consider underlying trends, the company’s infrastructure, and areas for rejuvenation.
Businesses in this phase are clearly not as robust as those in growth mode, but their valuations often reflect market realities. Lower valuations can be a boon to you as a buyer. Although consolidation has often taken place at this point, with trends pointing downward, this on its own isn’t a reason to avoid buying a company in this phase.
The first business I bought was at this stage, and I’ll get into why I chose that business and how I grew it, despite where it was in the industry life cycle.
Additionally, if you understand the industry’s life cycle, you’ll see that that decline phase is actually not always a straightforward decline.
In fact, oftentimes, industries can experience a rebirth through transformation and change. Recognizing this potential has been key to my own success in acquisitions, and I’m going to share how you can spot it yourself.
My First Acquisition Was in a ‘Dying’ Industry
My first acquisition was a book printing company in 2006 – a time when the print industry seemed to be on its way out. Newspapers were shutting down, bookstores were closing their doors, and everyone was proclaiming that “print is dead.”
Source: Jason Chatfield
Most people my age weren’t interested in the print business, but to me, this felt like a reason to look even closer.
Despite the narrative of an industry in decline, billions of dollars were still being spent annually on books. Sales were only down slightly, but the perception of collapse had opened up opportunities.
I noticed three trends at play that revealed news possibilities within a supposedly “dying” industry:
- The Rise of Digital Printing: New digital printing technology was emerging, making it possible to print smaller book runs more affordably. Instead of the huge offset presses that cost millions, these were essentially high-quality copy machines with specialized binding equipment that took up minimal space. This shift made low-quantity printing feasible, and I found it compelling.
- The Shift to Online Sales: Bookstores were closing not because people had stopped reading, but because they were buying online. Today, we all know the effect of an “Amazon takeover,” but back then, Amazon was still new. Amazon was just an online bookstore at that point, but it was drawing people away from physical stores.
- Growth in Independent and Self-Publishing: Thanks to online ordering and digital printing, there was an explosion in independent authors and self-published titles. Distribution and production were suddenly affordable and within reach for anyone who wanted to publish a book, fueling exponential growth in the number of titles being produced.
I realized there was an untapped opportunity here.
I noticed that while established publishers had extensive libraries, only a fraction of their titles were still in print. To turn a profit, they needed to do large print runs of 1,000-5,000 copies, which tied up a lot of their money in inventory. Typically, around 80% of their library was no longer available in print.
This made me think of the concept of the “long tail” that emerged with the internet. In online content, the idea is that instead of focusing on blockbuster topics like Jurassic Park or Batman, you can build success around niche interests with steady demand. I saw the same potential here: publishers had plenty of out-of-print titles that still had demand, but the industry hadn’t yet adapted to make it profitable to print smaller batches.
However, with the advent of new technology, publishers could now revive niche books and, in turn, generate profitability in a way that was once impossible.
A Modern Gutenberg Moment: Revitalizing Book Printing
With opportunity now discovered, my vision was to find a printing company in a mature market that I could acquire affordably.
The goal was to install new digital printing technology, which would allow short print runs at lower costs, and leverage this to meet the “long tail” demand from publishers. This was my reason for buying the company.
Starting out, I didn’t have a lot of money, and to be clear, I’m not someone who believes in the “no money down” approach – you need some capital. I had a little cash, but I was able to find a willing seller because so few people were interested in buying into this space. It was a contrarian move, but I saw potential and capitalized on it.
The company I bought was generating $8 million in revenue and served around 125 publishing companies. I assessed the industry trends and confirmed that transitioning to this new technology was both feasible and affordable. This wasn’t disruptive technology that would eliminate traditional print; it was simply a new wave in the industry.
To me, this felt like the biggest opportunity in book printing since Gutenberg’s press.
Just as Gutenberg’s invention democratized print centuries ago, this new technology would allow publishers to keep more titles in print without large financial commitments.
Source: WhatTheyThink | X
I ran the company for about a year, using its cash flow to invest in the digital printing technology. We then began offering this new service to our existing publishers, and the results were promising.
Within 18 months, digital printing accounted for roughly 25% of our revenue. It worked well – though, of course, there were challenges along the way.
Despite operating in a “declining” industry, we tapped into a steady demand that still existed within a specialized market.
When Buying in a Declining Industry Makes Sense
Buying into a declining industry might seem risky – if not a bit crazy. We didn’t have a natural tailwind pushing us forward, and that certainly created challenges.
But here’s the thing: I would much rather own a business in a declining market than try to create a market where none exists – which is often what entrepreneurs are taught to do.
The typical startup mindset says: go outside the established paths, give away equity to investors, and then try to create demand in a completely new space. But when you acquire a mature business, you’re starting with revenue, infrastructure, a customer base, and talented employees. The margin of safety is one of the biggest advantages an established business provides.
When it comes to declining industries specifically, there’s always some level of rebirth and transformation possible; the question is whether the existing infrastructure can support that evolution.
Source: Management and Accounting Web
In my case, it did.
Buying a business in a declining industry can also be fruitful for you. Here are the factors you want to make sure are in place:
- Undervalued Assets = Lower Multiples: Declining markets often mean lower valuations. This can create a valuable entry point for savvy buyers.
- Adaptable Infrastructure: Look for businesses with infrastructure that can be adapted to meet emerging trends. In my case, the company had printing equipment and customer relationships that could support a new approach.
- Potential for Rebirth: Even mature industries often have niches or submarkets experiencing renewal. Take the time to critically analyze an industry you’re interested in to determine whether or not these opportunities exist. Spotting them can be the difference between stagnation and growth.
Battling Through Economic & Industry Headwinds
Even though I found an opportunity for renewal in the publishing industry, it wasn’t smooth sailing from there.
When I bought this company, we took a strong initial step forward, but then the Great Recession hit. Around the same time, the Kindle and iPad came out, and electronic reading took off. Bookstores were closing down, and I had to make difficult choices – I ended up laying off 10-15% of our team and furloughing the rest. For a year, I even took my own salary to zero.
Needless to say, it was a brutal period for the company.
Leading a team during a time when so much is out of your control is one of the hardest challenges as an entrepreneur. Nevertheless, I committed to keeping the business running: I paid myself last, never missed a debt payment, and kept the company afloat even though the economic situation was bleak.
Month after month, as I made those payments, I gradually built equity in the company. Then, by year seven, I paid off the loan completely.
Although I initially intended to expand the company through acquisitions, an acquisition target turned the tables and offered to buy us instead. I accepted the deal, and the equity I’d built resulted in a seven-figure sale – a solid first exit that gave me the capital to reinvest and acquire more companies down the line.
The lesson here is this: when looking at companies in a declining industry, always keep a close eye on industry trends and consider the infrastructure that can drive success.
In most cases, it’s better to buy a business in a declining market than to try building a new industry from scratch.
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