Winning Factors and Warning Beacons for SMB

I used to work in Bain's Private Equity Group conducting strategic due diligence for acquisition targets. To help us, a few senior partners created a list of Winning Factors and Warning Beacons based on data from hundreds of client deals. The goal was to identify predictive signals visible at the LOI stage—not things that only become clear months later. We ran most deals through that framework, and it was pretty helpful. But that list was for $100M–$30B deals. SMB is a different beast. Here is my summary of the factors and beacons for the small business world, based on the deals I’ve seen. SMB WINNING FACTORS You generally need at least two of these. The deals I’ve seen with four or more are on track for 10X+ returns. 1. EXCEPTIONAL OPERATOR FIT: Most searchers are "smart," but smart is the baseline. The real win is Specific Knowledge. An Exceptional Fit is someone who has essentially run that exact business before. For example, a friend of mine has run several B2G SaaS companies between $5–$15M ARR. If she’s at the helm of an $8M ARR SaaS business, it’s going to crush it. Period. 2. DURABLE MARKET GROWTH: A rising tide lifts all boats. Look for volume growth above population and pricing growth above inflation. Ensure the drivers are sustainable (e.g., an aging population, a faltering electrical grid, or increasing income inequality). A Solo Stove trend is a fad; a crumbling grid is a long-term tailwind. 3. LOCAL MARKET LEADERSHIP (Local RMS): In SMB, "national leader" is irrelevant. What matters is who owns the city or neighborhood. Look for a Local Relative Market Share (RMS) of 2X your nearest competitor. Define the market carefully. A local organic lawn care company can have an RMS of 5X in its specific wealthy suburb, even if it’s a fraction of the size of TruGreen. 4. BUILT-IN GROWTH ANGLES: These are only slam dunks if they are pre-arranged and big enough to move the needle. Usually, this requires the buyer to already be in the industry—like buying an auto-body shop when you are already a preferred vendor for major insurance carriers. 5. REAL MARGIN OPPORTUNITIES: The most common lever is price. Look for "asleep at the wheel" owners who have been too lazy or timid to raise rates enough to keep pace with the market price. Cost-cutting opportunities are rarer and usually require industry relationships and experience to execute. 6. RECURRING REVENUE: It’s hard to mess up a business where customers return automatically. Bonus points if the service is essential and represents a tiny fraction of the customer’s overall budget. 7. THE MISPRICED DEAL: This can trump almost everything. Whether it’s a proprietary deal or a hasty broker, buying below fair market value creates instant enterprise value. SMB WARNING BEACONS Most of these can be mitigated, but proceed with caution. 1. THE BAD SELLER: If the seller is a bad person, the business is infected. I have never seen a wonderful culture exist under a bad owner. Beyond the cultural rot, bad sellers can be dishonest, manipulative, or fraudulent. I know of a seller who told customers to switch to a buddy’s company the day the deal closed, and another who helped employees start a competitor post-sale. In my experience, seller fraud is the #1 reason for fast failure. Building trust with the seller is a top priority in diligence. Look for chances to work with the seller directly—maybe coming on board as a consultant or helping to recruit a new hire. Look for your seller to demonstrate generosity; if they are willing to do something at their expense to benefit you, they’re more likely to be trustworthy. Lastly, seek outside opinions of them. Secret shop all their competitors and ask them what they think of the seller. You can even ask for references. You can’t engineer a deal around a bad seller. If your Spidey Sense won’t stop tingling, walk away. 2. KEY MAN RISK: A "key man" is anyone who can inflict great harm by issuing an ultimatum. The classic example is the essential license holder (e.g., Master Electrician) or the artisan whose customers are loyal to them and not the business (e.g., the star aesthetician at a med spa). Resentful or underpaid employees are particularly risky, especially if they are members of the seller’s family. The best way to deal with a Key Man risk is through formal contracting with the employee. When that’s impossible, meet with the employee and get to know them. Ask them directly how they feel about the deal, and how you can create a great environment for them. You also need to come up with a Plan B in case they leave. If your Plan B would sink the deal, don’t proceed. 3. CUSTOMER CONCENTRATION: Customers churn for a million reasons—acquisition, exit of a key employee, or even death. Don’t assume that all customers will stay. Instead, structure the deal to mitigate the risk. Use a forgivable seller note, an earnout, or a revenue share mechanism to bridge the gap. However you structure it, if losing 1–2 of your top customers sinks the deal, don’t proceed. 4. COMPETITION: This is usually a driver of lukewarm returns rather than disaster, but underestimating competition is a common mistake. I have most often seen this in markets with low barriers to entry and/or large competitors. Take lawn care as an example. Lawn care margins are generally low because of how low the barriers to entry are, but when you’re the smallest company with no route density it’s even worse. You will have to build volume before you become even marginally profitable. What a slog. 5. DISHONEST MODELING: This is the most common self-inflicted wound. Here are some of the fantasies I often see: - Unrealistic Downsides: This is the most common, and I understand why. You want the business, and you want to believe it will work. Magically, the downside you model always allows you to make debt payments without firing anyone. Not necessarily wrong, but suspicious. Real downside honesty is extremely important in your model—prioritize it! - Trend Line Continuation: Let’s say you continue the 8% revenue growth from the last 3 years despite the broader 3% market growth and no real "right to win." What’s more likely, continuing the outperformance of the last few years, or reversion to the market trend? Don’t blindly continue the trend. - Ignoring the Balance Sheet: Capital-intensive businesses are different than asset-light businesses. I see a lot of folks planning to undercapitalize a business, which leads to cash crunches down the line. 6. OPERATOR ERROR: Initiative is not the same as competence. Operators who have struggled needlessly tend to lack one of these things: - Experience: Desk jockeys in their mid-20s can succeed, but it’s rare. Mid-30s operators with P&L experience are much safer hands. Look for a background with at least one sharp achievement spike. - Humility and Self-Awareness: Beware the operator who shows up in a Mercedes or uses corporate jargon with line workers. You can tank an acquisition on Day 1 by being out of touch. - Skin in the Game: If an entrepreneur can just "go back to tech" if the business fails, they might not have the grit to make it work. If they don’t absolutely need it to work, they might choose not to. 7. OVER-LEVERAGE: When I bought my first business with SBA debt, my father-in-law warned me: “A personal guarantor is just a fool with a pen.” Kinda dark, but appropriate. If your debt load cannot survive an intellectually honest downside, don’t buy it. Refer to Scott Duncan’s visceral description of the experience of failing to make debt payments (Yale SOM website). Not fun. 8. FRAGILE TRENDS: Avoid businesses riding a temporary wave. For example, Enjoy Technology (white-glove in-home iPhone setup) had great recurring revenue contracts and impressive growth during COVID, but once people felt safe going back to the Apple Store, the $1.1B company collapsed and was scrapped for pennies. We see this in SMB with residential solar—the consumer math only works while state subsidies exist. When the subsidies dry up, you're left scrambling. FINAL NOTE This list isn't exhaustive, but it’s a reference I come back to before making a meaningful investment. If you’ve seen other factors that make or break a deal, I’d love to hear them!