Is it worthwhile to invest in niche markets when pursuing M&A?

Going against the grain may be the most strategic move for your business.

Investing in niche markets during an M&A transaction can generate high value, provided it aligns with the buyer’s strategy.

It is common to see investors focused on sectors that are “trending,” attracted by visibility, promises of rapid growth, and high multiples. Fintechs, artificial intelligence, and consumer marketplaces are some examples.

However, precisely because they are on everyone’s radar, these segments face intense competition, high entry barriers, and require a differentiated execution capability to generate real returns.

For this reason, niche markets have been gaining ground as more strategic alternatives. They offer less competition, more loyal customers, and real opportunities for differentiation.

Why consider niche companies as a smart decision in M&A?

1. Lower competition

Niche markets typically have few relevant players, which facilitates consolidation and accelerates market share acquisition.

Example: a logistics company that acquires a carrier specialized in refrigerated pharmaceuticals can quickly dominate that specific segment, facing less competitive pressure than in conventional transportation.

2. High specialization and customer loyalty

Niche companies typically serve specific demands and build longer-lasting relationships with their customers.

Example: a martech focused on luxury retail can be seen as a strategic partner due to its high level of customization and deep understanding of the client’s business.

3. Higher margins

By delivering solutions tailored to specific pain points, niche markets operate with higher margins.

Example: a tech company specialized in anti-fraud systems for digital banks can charge higher prices by providing a critical service with high added value.

4. Agility in innovation

Smaller companies operating in niche markets tend to be faster at testing, adapting, and launching new solutions.

Example: a fintech focused on rural credit can launch products tailored to the agricultural cycle much more quickly than large banks.

5. Strategic entry into new markets

Acquiring a niche player can be an efficient way to access emerging markets or specific regions.

Example: an energy company that acquires a solar microgrid startup in Northern Brazil can expand its operations with lower risk and entry cost.

But caution is necessary

Despite the advantages, investing in niches requires careful evaluation:

• Limited market: the scope may be narrow. It is necessary to analyze the actual size and growth potential of the segment.
• High revenue concentration: many niche companies rely on a few clients. This increases financial risk in the event of contract losses.
• Integration challenges: the culture and processes of the target company may be very different, making integration difficult.
• Sensitivity to external changes: regulatory or technological shifts can have a disproportionate impact on small niches.

When is it worthwhile to bet on niches?

The acquisition of a niche company tends to be more advantageous when:

• The buyer seeks differentiation and profitability, not just scale;
• The niche shows consistent signs of growth or is part of a long-term trend;
• There is clear operational or commercial synergy;
• There is capacity to scale the business using the acquiring company's resources;
• The target company possesses assets, relationships, or know-how that are difficult to replicate.

Strategic growth

Betting on high-growth sectors may seem like the natural path, but often it's the less targeted markets that offer better opportunities to build presence, profitability, and true differentiation.

The best opportunities aren’t always where everyone is looking. In many cases, the “right” move lies in the niches.

If you’re evaluating acquisition opportunities with a long-term strategic vision, talk to the team at Upside Investment. We provide specialized financial advisory in M&A and help you identify assets that generate real value for your business.