When I buy a business, I don’t just study the company itself; I study the industry around it. Over the years, I’ve learned that businesses don’t operate in a vacuum. They rise and fall along with the cycles of their industries. If I ignore those cycles, I risk buying at the wrong time, paying too much, or walking into headwinds I didn’t see coming.

Early in my acquisition journey, I focused narrowly on financials and customer relationships. But I came to understand that even a strong business can struggle if it’s caught in a downturn within its industry. That’s why I now treat industry cycle analysis as a core part of due diligence.

Why Industry Cycles Matter

Every industry goes through cycles. Some cycles are seasonal, some are tied to the broader economy, and others follow patterns of innovation, regulation, or consumer behavior. These cycles affect:

• Revenue predictability
• Valuation multiples
• Growth potential
• Financing availability
• Long-term sustainability

If I understand where the industry is in its cycle, I can make smarter decisions about timing, price, and strategy.

My Early Mistakes Ignoring Industry Cycles

In one of my first deals, I bought a company in a niche service industry right at the peak of its cycle. Demand was strong, margins were high, and everything looked positive. Within a year, the cycle turned. Demand slowed, competition intensified, and margins collapsed.

The business itself hadn’t changed, but the environment around it had. I had paid a high multiple for earnings that weren’t sustainable. That mistake taught me the importance of studying the bigger picture, not just the business in isolation.

The Framework I Use to Study Industry Cycles

When I evaluate a potential acquisition, I use a structured approach to study the industry.

1. Historical Trends
I look at revenue, pricing, and margin trends in the industry over the past decade. Has it been cyclical, stable, or declining? Patterns repeat, and past cycles often predict future ones.

2. Seasonality
I study seasonal fluctuations. For example, construction, tourism, and retail all have busy and slow seasons. Understanding seasonality helps me prepare for cash flow swings.

3. Economic Sensitivity
Some industries are highly sensitive to the economy. Luxury goods, real estate, and discretionary services often contract during downturns. Others, like utilities or healthcare, are more stable.

4. Technological Change
I evaluate whether technology is disrupting the industry. If new tools or platforms are reshaping customer expectations, I need to know whether the business I’m buying is positioned to adapt.

5. Regulatory Impact
Industries like healthcare, finance, and transportation are heavily influenced by regulation. A change in laws can reshape the cycle overnight.

6. Capital Intensity
Industries with high capital needs often cycle more dramatically because investment rises and falls with credit availability.

Questions I Ask to Test Cycle Risk

To understand where an industry stands in its cycle, I ask questions like:

• What caused past downturns, and how did businesses respond?
• How much demand depends on economic growth vs. essential needs?
• Are new entrants flooding the market, driving prices down?
• Is customer demand growing, shrinking, or plateauing?
• Are margins expanding or compressing?

The answers help me decide whether I’m buying into momentum or into decline.

How Industry Cycles Impact Valuation

Valuation multiples expand at the top of cycles and compress at the bottom. If I buy at the peak, I pay more for earnings that may shrink. If I buy at the bottom, I pay less and ride the upswing.

That’s why I never evaluate multiples in isolation. I always ask: Is this valuation based on peak earnings or normalized earnings?

Mistakes I’ve Made in Overestimating Cycles

I’ve also made mistakes by assuming cycles would last longer than they did. In one deal, I thought a booming trend would continue indefinitely. Instead, competition flooded in and margins collapsed faster than I expected.

That experience reinforced that no cycle is permanent. Timing matters.

How I Protect Myself

To protect myself from industry cycle risk, I:

• Normalize earnings across multiple years to account for peaks and valleys
• Structure deals with seller financing or earnouts to share risk
• Keep cash reserves for downturns
• Diversify across industries to avoid being overexposed to one cycle

By planning for cycles, I reduce surprises.

Why This Analysis Builds Confidence

Studying industry cycles doesn’t just protect me from downside, it gives me confidence in upside. If I know where the industry is heading, I can align strategy to capture growth instead of fighting headwinds.

Final Thoughts

I’ve learned that studying industry cycles is just as important as studying the business itself. Businesses live within industries, and industries move in cycles. If I ignore those cycles, I put myself at risk of overpaying or buying into decline.

That’s why I analyze historical trends, seasonality, economic sensitivity, technological shifts, regulatory risks, and capital intensity before committing to a deal. Because at the end of the day, I don’t just want to buy businesses, I want to buy them at the right time, in the right industries, with the right strategy to ride the cycles ahead.

I continue sharing my frameworks, lessons, and strategies for acquisitions at DrConnorRobertson.com, where I document the real playbook I use, deal by deal.