Why Fragmentation Creates Opportunity

February 18, 2026

by a searcher from City University of New York, New York City Technical College in Smyrna, DE 19977, USA

The cleaning industry remains fragmented, with thousands of small, family-run operators. Many of these owners rely on manual scheduling, limited marketing, and informal financial systems. This presents an opportunity for acquirers to implement technology, improve reporting, and scale operations efficiently. Consolidation and operational upgrades can unlock value without changing the core service offering. What operational improvements have you seen work best in this sector?

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Reply by an investor
from Polytechnic Institute of Milan in Metropolitan City of Milan, Italy

When an industry is fragmented there is usually a potential for ETA, since a SME can likely survive in that environment. A SME must make sure it does not need to compete against giants. Many people go beyond this, and instead of just acquiring a good SME in a fragmented sector to enjoy its cash flow they start making ambitious plans. Consolidation can come with considerable potential rewards, but also with higher risk, I believe. Opportunities are mostly obvious, I think. Economies of scale, better structure, the popular valuation multiple expansion, etc. But what are the risks? I'll offer you my experience as a customer who regularly pays for landscaping services (another heavily fragmented sector, at least in Italy, with many local microbusinesses, often run by a family). After getting angry with a couple of small companies, I hired a solopreneur. A tall, strong, young guy who's got all the incentive to work hard since he definitely does not work for a paycheck. He charged me about 20% less than others for similar tasks, and in one day and a half he accomplished by himself alone more things than a couple of men from the previous contractor would have done in two days and a half. I very much doubt he knows much about web marketing, governance, management control, advanced accounting and reporting, tech etc. However, as a side note, he's the best gardener I've ever seen. He charges a flat price based on what you tell him to do (regardless of how long it will take), he does not come up with excuses to raise the price after the job is done, and then he has all the incentive to get things done as fast as he can - he works like a berserker even without my supervision. So, whatever you do, please do not consolidate my gardener :) On a more serious tone, CFA charteholders are taught to be wary of apparent inefficiencies. For instance, a company which looks cheap at first glance might not turn out to be a great deal if you take the time to turn the stones. Even if you decide it is a likely bargain after deeper analysis, you have to make sure you understand why it is underpriced, otherwise chances are that you are missing something big (mispricing usually does not happen by chance, it is frequently an overreaction to a bad piece of news you have to be aware of). So, if you plan to dominate a fragmented sector by consolidating existing businesses, you should ask yourself these questions: - what is the likely efficient scale for such a business? - economies of scale can be obvious, especially on paper, but what are the diseconomies of scale? - if current sector fragmentation is apparently inefficient, why is it so? (I wouldn't take a simple "most people are stupid" as a valid explanation) - would a significantly larger structure go hand-in-hand with the current business culture? (don't overlook this one) - how would clients/customers perceive a larger player in a field where they are used to seeing microbusinesses? would they associate it to economies or scale (i.e. efficiency) or superior competitiveness? or would they think its more complex structure is full of people "who aren't actually doing the job [they are paying for]"? In the end, I think the analysis is up to you, and above all, the strategy is up to you to decide. The larger the extent to which you intend to modify an acquired company, the more you are departing from a known present situation (the ETA advantage) towards a rather uncertain future. In other words, make sure the potential extra gains are worth the higher risk.

Reply by a searcher
from University of Redlands in Phoenix, AZ, USA

So many. I can offer some insights if needed. I took over a failing, distressed commercial cleaning company, essentially rebuilt it operationally and even more significantly on the sales side, saved it from BK, grew it tremendously, and sold it via PE exit at a 3.5 MOIC. redacted if I can be more helpful in any specific areas or if you want to deep dive this for an opportunity you may have in this space

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