I understand why one would want to avoid cyclicality and seasonality when planning an LBO, especially with a service company with mostly intangible assets. That being both hard to finance and dangerous to buy at the top of the cycle. What isn't clear to me is how to determine if a business is cyclical? Does anyone know of any resources to try to determine this? Further, does anyone have any resources to try to determine where in the cycle an industry is?
Basically, I am seeing many businesses with revenue either trending up significantly or down significantly, and the rationale for these changes is unclear. So far of the ones I have dug into, it does not seem to be the owner driving these trends but the industry. I can guess, for instance, with a pool construction company doubling its revenue over the past 2 years, which, I assume, is a COVID bump due to public pools being shut down. But, that is an assumption, do pool construction companies normally follow the new home construction cycle? How about pool service companies, do they see a dip if the economy takes a downturn?
You can evaluate the company itself based on historical performance, this is OK, but alone may not tell you anything. For example, if revenue declined dramatically after 5 years of steady increases, they could have simply gotten bit by high customer concentration. Look to see whether the whole industry was suffering when their revenue declined - that will help you isolate whether it was the company or the industry. Either could still be a good investment at the right price.