This is Local Legends — a deep dive into the craft of building enduring small businesses. 🏆

Here, we share insights on constructing a business that's not just built for the short term, but soulfully crafted to withstand the test of time — and why that matters if you want to make an impact in your own entrepreneurial journey.

Last week, we demystified “niche businesses” in Unlocking the Potential of Niche Businesses: Part One. Today’s post goes further. Please enjoy.

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- Chase Murdock

IN TODAY’S EMAIL:

Unlocking the Potential of Niche Businesses: Part Two

The saying "riches are in the niches" rings true. I've seen it — up close.

Many of the niche businesses I've encountered are quietly amassing outsized earnings, free from the glare of media spotlight, and providing their owners with lives that are both meaningful and abundant.

They have a humble grandeur: unpretentious, yet financially strong.

But, let's get one thing straight: not all niche businesses are created equal.

This post breaks down the underlying attributes that make the best niche businesses great, how to unlock value in a niche business, and Decada’s general playbook.

Let’s start with four things we look for to tell the contenders from the pretenders in the world of small business…

The Four Essentials for Thriving in a Niche

1. Lower Competition

Big markets? They're flooded — like a rock concert everyone knows about. Niches, on the other hand, are the indie venues. Fewer people, sure — but a dedicated fanbase and less jostling for the mic. Their specialized focus keeps competition at bay, allowing for strong, stable margins.

When assessing the viability of a niche business, scrutinize its competitive standing.

💡 Conduct a thought experiment: What would unfold if the business raised its prices by 20%? This will help you gauge the strength of its market position.

2. Lower Capital Requirements

Here's the beauty of the right niche business: they typically don't need a vault of cash redeployed each year to maintain operations.

Beware the business that posts a paper profit on the P&L, but requires significant reinvestment in inventory, equipment, and machinery to keep the show going. We like businesses where the EBITDA to Free Cash Flow conversion is efficient — meaning there’s actually excess cash at the end of a good year.

Last year, I looked at acquiring a niche retailer on Main Street of a popular resort town. It had a great geographic moat (strong real estate on a long-term lease), awesome margins, and had been serving up a great product for over 10 years. The problem? The majority of its $800k annual EBITDA went back into capital expenditures every year. Real cash flow? $180k. Big difference — and you wouldn’t know it from the P&L.

3. Strong Moats

Evaluate the strength of the business’s moat. Businesses with great moats are fortified — not with stone walls but with unique advantages that competitors can't easily touch. Think of moats as a natural barrier that protects your business from outside threats.

What creates these moats? Expertise and specialized know-how can be one. If you're the only business that understands how to solve a very specific problem, you've got yourself a moat.

Another is a geographic. Imagine you’re a timber company with exclusive access to forests in a remote area. Or a retail business that owns its own real estate on a busy intersection.

Another can be specialized equipment. A foundry might have proprietary technology, expensive equipment, or highly-skilled labor that can produce parts no one else can — setting a high entry barrier for competitors.

4. Pricing Power

Pricing power is the Midas touch of business — and it’s my favorite one.

Pricing power is more than just slapping a higher price tag on your product. It's about having the room to increase prices and keep your customers. Why? Because you offer something truly differentiated your customer can't easily get elsewhere.

Consider the ingredients that make up this superpower:

• Brand Strength: When people trust your brand, they'll pay more. A strong brand sets you apart and adds an invisible value to what you offer.

• Unique Value Proposition: Whether it’s unrivaled quality, special features, or exceptional service, offering something distinct gives you pricing latitude.

• Customer Lock-In: Ever notice how some businesses make it hard to leave them? Whether it's a unique customer experience or deep integration into their workflows, make your business indispensable. This stickiness lets you up the price without losing your base.

• Scarcity: Be the rare gem. If what you offer is hard to come by, you’re in a prime position to charge more.

Pricing power is a blend of these factors. They work together to give you the leverage to command higher prices, thus fattening up those margins while keeping customers happily in your corner. It's not just business savvy — it's damn near alchemy.

Strategies for Unlocking Profits in the Niches

So you have a strong niche business. Here’s how to make it even stronger and unlock outsized profits as a result of specialization.

Unlocking profits in niche markets is a calculated endeavor, not a gamble.

Over the years, my team and I have identified a few key strategies that work remarkably well in extracting additional value in niche markets. Here are five: