Sourcing SMB Deals

Similar to my experience in more traditional PE investing, sourcing quality deals in the SMB space is really hard. In fact, it's even harder than the PE space because it's almost a perquisite to live in the same area that the business operates out of. After being asked for feedback and ideas around how to best source deals, I thought it would be worthwhile to write something that I could guide people to.

I think there are a few crucial principles to understand when sourcing deals:

1. This is a numbers game. You need to see a lot of deals to find “the one”. 
2. If you see an available deal, you need to ask yourself, why did other market participants (who likely know more than me) pass on this opportunity?
3. A smart buyer is a seller’s best friend. 
4. Focus, Focus, Focus.

When it comes to looking for deals, the most important step is to understand what you actually want to buy. It’s easy to pull out the size of business you want and the location, but it’s harder to narrow down the criteria of a business you like and even a specific industry. Before starting a direct sourcing approach, it’s important to answer these questions (as well as many more):

1. Do I want to buy a B2B business or a B2C businesses?
2. What industry do I like? Why do I like it?
3. Why am I a good owner for this type of business? What sets me apart?
4. How would I think about improving a business in this industry over 5-10 years?

These questions shouldn’t be easy to figure out. It’s smart to look at every remotely interesting deal you see from a Broker until you can determine what you actually like. Once you have a few industries picked out, it’s time to get really smart. Your education should be focused on becoming better at diligence so you buy the right business and can build a post-close value creation plan. 

Throughout your education process, build a document that outlines your interest in the space and why you think it’s a great opportunity for you. These ‘tear sheets’ can be a helpful way to gain credibility in the market. Ultimately, sellers and brokers want to deal with people who are smart and focused on a specific space because it increases their confidence that a deal will close and that they will see strong performance after the transaction. 

Once you have your industries selected and your working educational tear sheets built, it’s time to start hitting the market. There are two key routes:

1. Reach out to every broker in your area so they know details about the types of deals you’re looking for. Impress them and show them you know what you’re talking about. Use the tear sheet if you think it’s appropriate. Your goal is for them to call you as soon as they get a deal through the door that matches your criteria. You should be thoughtful in your follow-ups. Brokers are busy. While it may seem unlikely that a broker will see a business in your niche, there’s no reason not to build a relationship with them. 
2. Start sourcing directly with business owners. This is obviously more work, but the potential return is high. A deal with no competition is better than pretty much anything :). To be successful, you should model a program used by some of the top high-level sales organizations. You need to find the people / businesses you’re looking to target. You need to find a way to get in front of them. It needs to be multi-channel. Combining Linkedin, Email, Phone, Office Visits, etc. You need to find a way for them to care about what you’re saying. What is your messaging, why is it relevant for you, and why are they going to respond? You need to track data to understand what’s working and what needs to be changed.

There are a lot of technicalities that go into the details of direct sourcing, but rather than build a how-to guide, it’s important that everyone figures out what makes their pitch unique and sticks with it. 

The approach is relatively simple—the hard part is consistency. Most importantly, be thoughtful about the deal you want to buy, even if it’s been a year since you started. 

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