# The Beauty of Small Niches ## Markets too small to be worth attacking These companies do not chase large markets. They dominate narrow, overlooked ones — operating in what Hermann Simon called the **hinterland of the value chain**, B2B, supplying components and processes that end up inside someone else's product (REQ, Jul 2025, p.19, p.74). Why small is the point: - Competition is limited — **large PE firms usually skip markets this small**. - As market leader you set prices rather than take them. - Products are mission-critical and recurring, so customer ties are sticky. - Businesses are asset-light, low capex, low working capital. Worked examples from the deck: a global leader in demolition robots with **~70% share of a ~$300m market**, 30%+ operating margins, sales up 30× in 30 years (Brokk, inside Lifco); and companies operating across niches of **$200–300m each with 25–30% share in every segment** (p.19). > [!tip] The traits REQ looks for in the acquired business > B2B. Mission-critical, often customised, at relatively low cost — which creates lock-in, high retention and pricing power. **Flow products / consumables** tied to a customer's opex rather than capex, which makes revenue predictable and decouples it from cyclical capital spending. Favourable working capital and limited in-house production, so capital requirements are low (p.74). ## Why "unattractive" is the feature Limited growth prospects make these businesses less sought-after in auctions. Size thresholds disqualify other buyers. Neither deters an acquisition-driven compounder, because *the parent supplies the reinvestment engine the business itself lacks* — cash goes out of one niche and into the next. The lack of competition for the asset is precisely what keeps the entry multiple low (p.77). Value-based pricing replacing legacy cost-plus pricing is one of the most common post-acquisition organic uplifts (p.36). ## Heico as the archetype Founded 1957, Mendelsons took over in 1990. One of the world's largest independent providers of FAA-approved engine and component parts — mission-critical to airlines. 6,400 team members and 88 acquisitions of niche businesses, and it kept its agility. Since 1990: **21% annual returns, 67,900% total** (p.75). > [!quote] Larry Mendelson, Heico CEO > We are not merely an aerospace company, but rather a vehicle that generates strong cash flow through aerospace parts and technology. ## Why it matters This is the same structural-moat test as [[Quality Compounders]], applied one layer down: the *subsidiary* has the moat, the *parent* has the reinvestment engine. Judging the parent means judging a portfolio of small moats, not one large one. ## Related - [[Acquisition-Driven Compounders MOC]] - [[Quality Compounders]] - [[Bottleneck Business]] - [[The Dual Engines of Growth]]