Investing in SMB acquisitions over the years: How a once-fragmented market is more accessible than ever

Small and medium-sized business (SMB) investing might be new to you, but the market has been around for years—and it's evolving fast. Where once a handful of insiders dominated the industry, SMB investing has become more accessible to more people, particularly with the rise of search funds and new digital platforms. If you’ve ever thought about diving into SMB investments, understanding their evolution and the challenges investors once faced—and still face—will help you make more informed decisions in this exciting yet complex space.

The growing appeal of SMB investing

The lower-middle-market private equity space, which focuses on small and medium-sized businesses, has long been difficult to access for most investors. Traditionally, SMB deals were handled through private networks, often involving word-of-mouth introductions or investor lists. For a long time, those who wanted to back SMB acquisitions faced a fragmented landscape, limited deal flow, and a lack of standardization across opportunities.

“I equate the self-funded search space today to venture capital in 2009," said Tim Ericson, founder of SMB fund. "It’s been around for a while, but it’s starting to become more mainstream with best practices, playbooks, and institutional capital flowing in."

The focus on acquisition offerings, rather than startup or growth equity investments, plays a huge part in the increased accessibility and appeal of SMB investing. 

While startup and growth equity investments commonly face adverse selection challenges and high failure rates, SMB acquisitions offer a different risk profile. These deals often target established businesses with a proven history and can provide better risk-adjusted returns. This fundamental difference has been a significant driver of investor attention in the SMB space.

The appeal of SMB investing extends across different investor profiles, too. For investors familiar with the private equity asset class like high-net-worth individuals and family offices, the rise of self-funded searches and direct SMB investing offers an attractive alternative. It allows them to invest directly in deals without fund management fees while providing flexibility in selecting individual opportunities. Meanwhile, for investors familiar with other alternative assets, SMB investments present a compelling balance of growth potential and income generation. This combination is particularly appealing when traditional alternative investments, like venture capital and real estate, see periods of underperformance.

Challenges in accessing SMB deals

In the past, investing in SMBs often required direct relationships with operators or niche investor networks, making it difficult for outsiders to gain access to quality deals. That difficulty had multiple prongs: Finding deals was hard enough, but knowing if the operators were trustworthy or if the deal terms were fair required even more diligence. There was little consistency or transparency, making it tough to compare one investment opportunity to another. It also often pitted small investors against private equity, which had far greater resources at their disposal.

“One of the toughest parts of finding deals is the fragmentation of brokers and deal networks,” Ericson said. “Even with aggregators that try to pull deals together, you’re only seeing a small portion of what’s really out there. And once a deal goes public, there’s a flood of interest from searchers.”

This means that while the SMB investment space is growing, it still requires shrewd acumen from both investors and operators. In today’s landscape, having access to a vetted deal flow—and understanding the complexities of each investment opportunity—can make all the difference.

The rise of the search fund

Historically, search funds managed SMB investments, where investors would back an entrepreneur looking to acquire a business. However, these funds came with significant risks—many transactions would simply never happen. Even when they did, investors often took a majority ownership position, especially in larger businesses. This structure wasn’t ideal for individual, smaller-scale investors, especially those looking for smaller deals or greater flexibility.

Today, the search fund model has evolved. More entrepreneurs are choosing self-funded searches, where they finance their search process and seek investors later in the deal. This gives investors a chance to invest in “gap equity,” a middle ground between debt financing and the entrepreneur’s own capital. 

“We’re seeing a massive shift," Ericson said. "It used to be mostly people buying a friend’s business or MBAs fresh out of one of the top schools. Now I’m getting a call a week from former venture-backed CEOs who want to get out of high-growth and into buying an SMB.”

The rise of self-funded searches has not only created more opportunities for investors but has also empowered entrepreneurs to operate with greater autonomy, often while securing Small Business Administration (SBA)-backed loans, which generally have low default rates.

Legal and regulatory risks in SMB investing

While SMB acquisitions offer potentially high returns, they come with their own set of legal and regulatory challenges. Poorly structured deals or inexperienced legal counsel can expose both operators and investors to unnecessary risks. Ericson highlighted the importance of working with qualified legal professionals, especially when negotiating key deal terms like customer concentration or management handover, both of which can impact long-term success.

In the past, there were few standardized deal terms in the SMB space. 

“It feels like venture capital 15 years ago before SAFEs and other standard investment vehicles simplified the process,” Ericson said. "There are several people in the space that are working towards standardization, and so that it becomes a lot cheaper and easier to do these types of deals."

As the space continues to professionalize, more consistent structures are likely to emerge, making it easier for investors to evaluate and compare deals.

New platforms and the future of SMB investing

One of the most significant changes in the SMB investing landscape is the rise of digital platforms that connect investors directly with operators. Platforms like Mainshares are filling a gap by providing investors with curated opportunities in small business acquisitions, complete with vetting processes and standardized deal terms. This is a major shift from the past, where access was limited to those with personal connections or deep pockets. Ericson alluded to AngelList, which revolutionized access to early-stage venture deals.

“In 2009, AngelList was just getting started, and now it’s doing hundreds of deals a month. I think we’re five years away from seeing that same volume in SMB investing, but we’re definitely moving in that direction,” he said.

The ability to access vetted deals with standardized terms, alongside professional investors, is likely to drive further growth in the SMB space. This represents a significant opportunity for those looking to diversify their portfolios without diving into the high-failure-rate tech world. 

“At the end of the day, the returns in SMB aren’t that far off from what venture capital funds expect—around a 30% IRR—without the same level of risk,” Ericson said.

Investment terms and governance models

For investors new to the SMB space, understanding different governance models and investment structures is essential. 

Some deals allow for silent partnerships, while others may require more active management. The governance model you choose often depends on your level of experience, risk tolerance, and desired involvement in the business.

Ericson's firm, for example, typically takes a minority position in the businesses it invests in and has a narrower focus than most.

“We only do deals that use SBA financing, meaning the searcher personally guarantees the loan. That helps ensure they’re acting in good faith,” he said. 

As the SMB investing space matures, standardized governance documents become increasingly important. Platforms like Mainshares have taken steps to simplify and streamline this process by offering standardized governance documentation that covers important aspects of the investment relationship, including voting rights, information rights, and exit provisions. These documents help ensure consistency across deals and provide clarity for both investors and operators. 

As for investment terms, one model that has gained popularity is the participating preferred structure. A preferred return gives investors priority in receiving their initial capital and a certain rate of return before distributions are split with other share classes.  This structure offers a balance between the security of debt-like returns and the potential for equity-like upside.

Conclusion: A bright future for SMB investing

As SMB investing continues to expand and professionalize, more investors will gain access to a previously fragmented market. Whether you’re a seasoned investor or new to the space, understanding the evolution of SMB acquisitions and its challenges can help you navigate an exciting frontier.

With the rise of self-funded searches, more structured deal terms, and platforms like Mainshares simplifying the process, the future of SMB investing looks bright. For those willing to invest, it’s a chance to achieve meaningful returns while supporting the growth of small and medium-sized businesses nationwide—something almost anyone can get behind.

Join the growing class of SMB investors today and see the opportunities that await.

Information posted on this page is not intended to be, and should not be construed as tax, legal, investment or accounting advice. You should consult your own tax, legal, investment and accounting advisors before engaging in any transaction.