A meander of the Sugar River providing excellent waterpower led Peter W. Matts to acquire acreage in Montrose Township in 1846, where he built a sawmill in 1847 and soon added his home, a tavern, and a general store. He platted Paoli in 1856 and named it for a town near his Pennsylvania birthplace. In 1864, Francis and Bernard Minch bought the sawmill and built a stone grist mill. By the mid 1870s, the community had a school, post office, two churches, a cheese factory, two hotels, a doctor, and several tradesmen. Although the Chicago, Madison and Northern Railroad bypassed Paoli in 1888, the settlement continued to prosper past the turn of the century, with a local band, a well-regarded baseball team, and a theatre group, while the public ground and Fischer Hall hosted holiday, social, and political events. As the mill era passed, the population declined, but more recently the community has shown new vitality through restored buildings, a new town hall, and new businesses.