What We Look for in SMB Acquisitions

A decade ago our team set up a holding company because we liked the idea of building a long-term, ever-green portfolio instead of chasing quick exits. Since then we’ve screened hundreds of “tiny” companies, a label we use for firms with annual revenue anywhere from $750K to about $5 million. 

The size may be small, but the stakes are high: once we add a business to the family, it has to complement the rest of the portfolio while rewarding everyone involved, founders, employees, and investors alike. Below is a candid walk-through of the key traits we hunt for before signing a term sheet.

Founder–Market Fit and Ambition

The jargon “founder–market fit” pops up so often it risks losing meaning, yet it remains the single biggest driver of success in the micro-cap world. We study three signals in particular:

Time in the trenches

When a founder has spent years inside an industry, performing frontline work, bouncing between roles, or living the customer’s pain points, it shows up in the clarity of their answers and the calm in their eyes. That depth of experience becomes an insurance policy during inevitable downturns.

Attitude toward continuous improvement

Tiny companies plateau when owners decide “good enough” is good enough. We look for builders who tinker, measure, and iterate even when cash flow is healthy. If the founder is still shipping new features or upgrading processes after ten late-night emails, that’s our kind of partner.

Pragmatic, not reckless, ambition

A micro business rarely needs venture-style blitz-scaling, but it does need a north star. The founders who impress us talk about hitting $10 million in revenue with a concrete roadmap, rather than day-dreaming about $100 million without a clue how to get there.

Clean, Understandable Financials

We’ve walked away from otherwise charming businesses because the numbers looked like someone had spilled alphabet soup on the spreadsheet. Chaos in the P&L often masks deeper issues, hidden debt, lumpy revenue, or a dependency on one whale customer. To keep everyone honest, we insist on:

• Consistent gross margins: We don’t need 80 percent SaaS-level margins, but we do need evidence that costs are stable and pricing power exists. Sharp month-to-month swings raise red flags.
• Transparent owner adjustments: When the founder’s truck, home Wi-Fi, and four family cell phones run through the business, that’s fine, as long as the add-backs are documented. We can’t model a future we can’t see.
• Cash conversion discipline: A tiny company lives or dies by its working-capital cycle. Businesses that wait 90 days to collect invoices while paying suppliers in 15 rarely survive bumps in the road. We favor models that convert revenue to cash inside 45 days, or have a plan to get there.

A Durable, If Modest, Moat

People associate moats with billion-dollar companies, yet a micro business can own a defensible niche no giant bothers to conquer. We probe for durable advantages hiding in plain sight:

• Local network effects: A commercial plumbing outfit that owns every service relationship within a 40-mile radius effectively blocks new entrants, no algorithm required.
• Embedded switching costs: If customers must re-train staff or migrate years of data to leave, retention skyrockets. We like products that feel “small,” but whose workflow impact is anything but.
• Specialized expertise: Our portfolio includes a CNC machining shop that focuses on aerospace parts under 12 inches. Because tolerances are brutal and regulation intense, the niche scares off generalist vendors, and customers stay loyal for decades.
  

While none of these moats is bulletproof, together they lengthen the runway we need to modernize operations and layer on technology.

Cultural Resilience and Operational Grip

Buying a company with a brittle culture is like inheriting a classic car whose engine rattles at every stop sign. Sooner or later something gives. Before we release funds, we spend days on-site watching how people interact:

• Communication loops: Daily huddles, end-of-shift checklists, and visible metrics on the wall tell us information flows freely. Silence, on the other hand, breeds surprises.
• Employee tenure: A steady roster of three-, five-, and ten-year veterans signals mutual trust. Revolving-door head counts, especially in roles critical to cash generation, scream overhead we can’t see.
• Safety and compliance habits: Tiny companies sometimes skate around OSHA or GDPR rules, hoping regulators never show up. That attitude bleeds into other shortcuts. We walk the floor, flip through logs, and confirm that “good enough” in safety isn’t actually bad.

Once cultural health checks out, we dig into operational grip, the ability to execute without heroic efforts. We favor companies that:

• Document core processes in writing or video: Tribal knowledge is charming until the tribe quits.
• Track leading indicators: Units produced per hour, net promoter score, or churn forecasts matter more than last quarter’s revenue, because they predict tomorrow’s.
• Embrace corrective action: If a machine breaks, does management search for root cause or simply swap parts? The former mindset compounds value; the latter leaks it.

Symbiotic Potential Inside the Portfolio

A holding company works best when the whole outperforms the sum of its parts, so we ask how each prospect might benefit brethren businesses:

1. Cross-sells and shared customers: Our specialized machining shop feeds its aerospace clients into a sister company that performs nondestructive testing, shaving weeks off the supply chain for both.
2. Centralized back office: By migrating accounting, HR, and payroll to our shared services hub, we strip out duplicate overhead and free founders to obsess over customers.
3. Technology leverage: When we integrate a lightweight ERP or an AI-powered quoting tool into one portfolio company, we immediately look for “lift and shift” opportunities across the rest. The incremental cost approaches zero, while the impact multiplies.
4. Talent mobility: An operations manager who nails efficiency gains in a food-manufacturing plant can mentor the manager of a newly acquired cosmetics facility. Knowledge travels; mistakes don’t have to.
5. Risk diversification: Because our mix spans service, light manufacturing, and software, a cyclical slump in one corner rarely jeopardizes the entire enterprise. A candidate that broadens the portfolio’s risk profile, say, a recession-resistant niche, earns bonus points.
   

For a tiny company, symbiosis isn’t just a cherry on top; it can be the factor that turns a steady five-percent grower into a ten-percent compounder once integrated, not growth at all costs.

The Intangible “Why Now?”

Finally, we ask ourselves why this business, and why at this moment. Sometimes the answer lies in a generational shift: the founder wants to retire, the kids aren’t interested, and employees crave continuity. Other times, market conditions tip in our favor, a sudden regulatory tailwind or an emerging technology that the tiny company can adopt faster than a behemoth.

We move only when we can articulate a clear “why now” that resonates with the seller, energizes our operators, and aligns with our capital timetable. Patience pays: passing on a great company today hurts less than buying a mediocre one we’ll regret for a decade.

Closing Thoughts

Sifting through micro-cap opportunities may look glamorous from the outside, but, in practice, it is a game of disciplined curiosity.

We spend long evenings parsing financial statements, coffee-fueled mornings on factory floors, and countless hours chasing the subtle tells that separate durable companies from fragile ones. 

In short, we want portfolio companies that do not need micromanaged.

When the right deal surfaces, anchored by gritty founders, clean numbers, modest moats, resilient culture, and symbiotic upside, our holding company commits resources with full conviction.

If you’re building a tiny business that meets these criteria and you’re pondering what comes next, our door is open. We don’t offer a silver bullet, just a steady hand, deep pockets, and a belief that small can be mighty when partnered with the right team.

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