What We Talked About:
I sat down with Sean Smith from SMB Investor Network and we broke down exactly how first-time buyers can actually raise equity to buy a small business — without the usual myths, BS, or dead-end advice.

We covered:

• What investors really want to see before they write a check

• Why having your own skin in the game still matters (sorry, no magic button)

• How to spot businesses that actually attract investors — and which ones scare them off

• The biggest red flags investors look for (and how to avoid them)

• Why SMB investing is exploding right now — and how you can ride the wave

• How to get your deal in front of the right investors (instead of getting ghosted)

• How to position yourself so investors want to work with you

If you’re serious about raising money to buy a business — and you’re tired of bad advice — you’ll want to hear this.

Watch the Video

Listen to the audio:

 

Transcript 

Jon Stoddard (00:00.93)
Welcome to Top &A Entrepreneurs. Today, my guest and having back for a second time, Sean Smith from Search Fund Investors and founder of SMB Investor Network. Welcome to the show, Sean.

Sean Smith (00:13.319)
Thanks for having me again, John.

Jon Stoddard (00:15.64)
I got to tell you, so first of all, we're going to talk about SMB investor network and why you built it, what was the need, but I got to tell you, I am not an equity partner, full disclosure, not an equity partner, but I am an advisor. I value the service because let me describe the scenario. I help people teach people how to buy their first business and so more, more than common, I come up with some individual that's a W-2 or military guy.

And they got a great credit score. They find a business. They can get an SBA loan, but they need 10 % down equity injection. So they don't have $300,000 to put in there. So what do they do? And that's where I think you guys come in SMB investor network. So tell me a little bit about the business and why you built it.

Sean Smith (01:07.803)
Yeah, absolutely. And as you said, you know, we spoke probably six or nine months ago or so about search fund ventures, which was our fund, right? And that fund is still humming. It's got committed capital and we invest in exactly the kind of folks that you just talked about, right? But what we kept seeing was there's, you know, an opportunity for to bring more investors into these deals in many cases beyond what our fund invests.

Jon Stoddard (01:18.125)
Yeah.

Sean Smith (01:37.299)
And that's a really big way to support folks like the person you described who needs that extra capital to buy their business. So if we can't get the full amount through our fund, in many cases you can't because with SBA deals, you can't own more than 20%, right? We can send that around to our network and bring in more investors to be supportive there. So that's really the goal and that's why we've started it.

Jon Stoddard (02:02.798)
So you have another partner, Nick Bryant, and he's more of the coding guy and he's also a Silicon Valley guy. When the first time we talked, he said, this is like Angel List. And if you've ever been in Silicon Valley, you know what Angel List, it started 15 years ago or so, just a list, an email list of people said, hey, if you know of some deals, let me know, I'd be interested in investing. So you guys kind of built this on that model, right?

Sean Smith (02:30.011)
It's exactly right. And it started the same way. We had an email list. We still have the email list. And essentially, what we would do is send around co-invest opportunities that we had looked at for the fund. We'd said, this is a great deal. We want to invest in this. And then we would send that around as a newsletter, basically. Say, hey, here's a deal that Search One Ventures is investing in. Come join us.

And like you said, Nick, my business partner saw that and said, hey, there's a real opportunity. We've already got this great network. We grew it to about 250 people in less than a month. And it's now at about 1200 folks over the course of six months of kind of sending around deals. And Nick said, hey, we've got the network. It makes all the sense in the world to turn this into a platform.

Jon Stoddard (03:18.328)
Yeah, and Nick's a magic coder, man. He turned that thing around pretty fast.

Sean Smith (03:23.205)
Unbelievable, that's for sure.

Jon Stoddard (03:24.418)
Yeah. So let's talk a little bit about what this looks like. So when it comes to raising equity injection for an SMB acquisition, where do most first time buyers go wrong when they do this?

Sean Smith (03:40.209)
Yeah, so I think one of the trickiest parts about raising equity in this self-funded search, independent sponsor world is you have such a narrow time window to do it.

Jon Stoddard (03:51.084)
What is that? That's like 90 days, right?

Sean Smith (03:53.415)
Yeah, I mean, it kind of depends on the LOI, but more than that, it depends on when you get your marketing materials together to actually go hit the market if you have to go to the market, right? So, know, what a lot of folks do, you spend 12 months or more searching to find a business. finally, you know, have got the great business that you're excited about under LOI. Your LOI has exclusivity for 60 days. Now you've got to scramble to get your materials together to go send that around to investors and to go.

Jon Stoddard (04:02.168)
Right.

Sean Smith (04:22.213)
start having those conversations, right? So we like to try and start speaking with searchers, independent sponsors, folks that are kind of, I would say newer to the small business acquisition space. We like to speak to them early so we can kind of set that expectation that once you start going to the equity markets to raise capital, most investors are going to need at least two to four weeks to make their decision in a lot of cases, right? So you've got to

Jon Stoddard (04:50.328)
Just think on it, do their due diligence, right?

Sean Smith (04:53.475)
Exactly. Right. So you're going to, if you don't start marketing that deal until 30 days into your exclusivity period, you're cutting it really close. Right. So we recommend to folks, they start talking and getting their stuff together, at least building the relationships, you know, right before they signed that LOI.

Jon Stoddard (05:11.598)
Yeah, so what I see frequently is, you know, the buyers, they'll go out to BizBiz, they'll find a good business, just an example, and I'll put an LOI on it. And they're eligible for SBA because they say the BDO from SBA says, ah, pre-qualified, right? I'll get that. But they don't know where to go right now. Most people don't know where to go to raise $10,000, let alone, you know, 200.

Sean Smith (05:37.521)
Yeah, well, so that's what we are certainly trying to establish is that we've got a great network of investors. Folks can come, in some cases we can be between our fund, between the network and some of the lead investors we work with, we can be the sole kind of source of capital if they need that. And at the very least, we can really be a supportive partner in getting that equity raised to the finish line. So that's exactly why we're building what we're building.

Jon Stoddard (06:05.102)
All right, so what type of deals attract investors the most that you think if I go to SMB investor, I start filling it out, which ones attract the easiest right now? You know, which ones like, that's going to be hard to do to fill out.

Sean Smith (06:23.953)
Yeah. So I'd say, you know, the general search fund or small business acquisition thesis is still kind of the one that most of our investors are anchored towards. And what that looks like is, you know, a healthy, essential business that's been in operation for probably 10, 20, 20 plus years. You know, the owner is selling it because they're ready to retire. There's probably a meaningful portion of consideration that's deferred.

in either a forgivable seller note or something similar to kind of align those interests and reduce the multiple. And ultimately you're buying it below five times EBITDA. Those kind of low purchase multiples are one of the reasons so many people, mean, all the investors we talk with say, we're so excited about this space because you can purchase great businesses for so much lower than you can in the public markets, for example. So I think those dynamics are critical. A lot of folks focus on

revenue quality and kind of those essential industry dynamics like I talked about. So are there recurring contracts that, you know, create those kind of recurring revenue streams or reoccurring purchase behaviors? Is the industry itself generally, you know, non-cyclical, non-sensitive to discretionary spending? Those sorts of dynamics are, you know, the ones that all culminate into a really attractive profile. Go ahead.

Jon Stoddard (07:49.474)
Yeah. Let me, let me, let me go through a couple of examples. What about e-commerce right now? know you got right now we're in the middle of a, tariff or with China and anything come from China has got a hundred percent plus import tax on it basically. So what about e-commerce if it, if it's not Chinese good, what about e-commerce?

Sean Smith (08:11.997)
So when you think about e-commerce, you've got to think a little bit about the product or if someone's selling a service through a service marketplace, if you're considering that e-commerce, you've got to think about what is the actual product or service being sold through an e-commerce platform. And I think, again, you want to look back to that essential, almost mission critical type dynamic for a lot of these types of deals.

That's not to say all investors think that way, right? I think that's kind of one of the more common themes in the space. That's how we, from the fund, typically underwrite deals. But there are some folks that will say, you know, as long as the company has demonstrated a great kind of consistent earnings profile, that's just as good in our minds as it being kind of mission critical. And I can give a great example of that. You know, there was a really interesting business with a great sponsor backing it in the...

in the eyewear sector and the business had just had tremendously consistent earnings over the past 10 years. Not even a single blip, not during COVID, not during any kind of shocks you might expect. But we deemed that the business itself was not essential to the buyers. wasn't kind of.

glasses or kind of prescription lenses, it was more towards kind of the sunglasses and that kind of angle. So it wasn't a fit for our fund, but there's plenty of investors that could have been all over that deal and that it could have made a lot of sense. So I think if you think about...

Jon Stoddard (09:52.334)
on SMB investor network, right? Yeah.

Sean Smith (09:55.249)
Certainly, yeah. So I think if you think about, you know, something like e-commerce, you're going to want to look closely at how much of the, you know, how consistent is earnings? Are there, you know, reoccurring purchase dynamics, just all the indicators of high quality revenue, I would say.

Jon Stoddard (10:12.95)
Is it a good deal? It's always back to, is it a good deal? Right? Yeah. What about, let me ask you about MedSpas and software. So you can talk about those.

Sean Smith (10:15.921)
Right, exactly.

Sean Smith (10:24.019)
Yeah. So MedSpas is an interesting one. We know a few folks that have done tremendously well in that space. think, again, the MedSpas deals we've looked at have not kind of passed the essential business test for us, but they certainly pass high quality revenue dynamics. And that's part of the reason people have done so well in that segment. If you have a treatment that

Jon Stoddard (10:42.509)
Yeah.

Sean Smith (10:50.191)
once you start doing it, maybe it's Botox or something similar, you need to keep going back.

Jon Stoddard (10:56.846)
Injectables, man, you get addicted to it. Not me, I'm just saying, I look at it in a med spas. It's the addiction to injectables.

Sean Smith (11:03.057)
Yeah, I teed you up for that one to be fair. But yes, the kind of recurring dynamics in that industry are certainly there, right? Software, that one really just depends on the essential kind of mission critical piece. And is it something that once someone purchases the software, it becomes essential to what they're doing, whether that's their lifestyle as a consumer or if it's a business.

Jon Stoddard (11:07.148)
Yeah

Sean Smith (11:30.341)
I think like a CRM, once you start using a CRM, all your data is in that software. You start building processes around that software. becomes pretty essential. Right. So it's same dynamics exists. The one thing about software that's, that's been challenging, from a small business standpoint is it has kind of global, you know, economies of scale in a sense. Right. So you can really run a software company from anywhere and, and, you know, essentially

Jon Stoddard (11:38.51)
Switching costs are too prohibitive, yeah.

Sean Smith (12:00.051)
have competitors that are running software from anywhere versus if you think about like a trade contractor, you know, an HVAC business, you got to have folks within a 50 mile radius, pretty much of that, you know, service area, right? So that, that is one dynamic that makes competition a little more challenging in software.

Jon Stoddard (12:13.699)
Yeah.

Jon Stoddard (12:19.032)
Yeah, what about accounting firms?

Sean Smith (12:21.895)
We've looked at a couple accounting deals and I think the essential dynamics are certainly there in certain categories like tax and bookkeeping, things like that. One of the challenges with accounting firms, depending on the size, and this is true for any professional services firms, a lot of those relationships tend to be with the owner of the business, in many cases.

Jon Stoddard (12:49.859)
Yeah.

Sean Smith (12:51.571)
You can almost expect when you buy a business like that, a professional services firm, that there's gonna be pretty material churn in the early days, first probably 12 to 24 months. So you almost have to underwrite the deal, assuming that you're gonna lose customers who were golf buddies, right? Now the challenge is figuring out who or which customers have those dynamics, but.

Jon Stoddard (13:09.912)
Yeah, yeah.

Jon Stoddard (13:16.578)
Yeah. I'll tell you a story about that. I did some work for a guy that owns a very large county firm in Las Vegas. he, somebody brought me a deal. It was in Northern California. The guy was 78 years old and he had these questions all teed up and he goes like, Hey, how did you bring your business in? you know, the Rotary Club, Qantas Club, you know, meeting people in chamber commerce, stuff like that. And, and he like,

put a risk on that of how many people he'd lose after he bought it. He thought, I think it's 50 % of clients will lose. He said he's not going to buy it just because they were too attached to the owner.

Sean Smith (13:55.825)
Yeah, mean, look, if you can underwrite a deal with that assumption in place, mean, exactly. I mean, that's the quote from, I think it was Warren Buffett or someone similar that said, the best diligence is buying at a low price.

Jon Stoddard (14:02.22)
Yeah. Price that into it. Yes. Yeah.

Jon Stoddard (14:15.81)
Yeah. Yeah. Those risk ends. So which are the hardest to fund? I'm not only talking about, you know, search fund adventures, but right now SMB investor in Erica has 1200. A year from now, it could have 10,000 people. So there could be an Airbnb variety going on.

Sean Smith (14:34.695)
Yeah, that's absolutely right. mean, I think the market right now is most favorable to businesses that generate a nice amount of cash flow that's pretty durable and visibility into that cash flow, those earnings is pretty certain, whether that's through backlog or contracts, multi-year contracts, things like that. think that's right now, that's where the market is most excited.

or most, you know, most favorable towards, I think towards the kind of growth strategies, especially those that aren't necessarily very profitable at this point. And there's some uncertainty around, you know, where they're headed. Those are the ones that are most challenging to fund right now. And you see that, you know, in many areas of the venture capital market too, right? Other than AI, a lot of funding is dried up for companies that are not generating a profit and need capital to grow.

Jon Stoddard (15:25.411)
Yeah.

Jon Stoddard (15:32.888)
Yeah. Yeah. All right. So how much, personal capital do buyers, let's say somebody SMB buyer comes in, great credit score, got the deal under LOI reasonable valuation. How much capital should they bring in to the deal? Their skin in the game, because this is essentially supposed to say, okay, we can make up the difference or we can bring much more than their difference. What's so what does that look like?

Sean Smith (16:03.091)
Yeah, it varies a bit. You know, there's kind of this concept of the self-funded search structure and then the independent sponsor structure, but generally across the board, you know, if you're talking about deals that are below 3 million in EBITDA earnings, right? You're not talking about kind of the lower middle market private equity deals that are, you know, 5 million in EBITDA or something like that. These lower, these kind of micro cap deals.

as they call it, you generally see around two to 5%, depending on the deal size and kind of the searcher sponsors background, two to 5 % of total sources of capital comes from that searcher or that sponsor. It's not uncommon, that's right, yeah. It's not uncommon to see, call it 200, 250K or so from,

Jon Stoddard (16:45.582)
Two to 5%. Okay. Of the total enterprise value. Yeah.

Sean Smith (16:58.373)
a single searcher or even a partner searcher invested, partner search team invested in the deal. We've seen as low as 50K on smaller deals, but usually there's something there.

Jon Stoddard (17:10.158)
Yeah. Is this kind of click bait ish question. What about those somebody that says like, man, I don't have a lot saved or something happened in their past. They don't have a lot saved kind of going, can I buy this business with basically no money out of my pocket? If I go to search, you know, SMB investor network and it's a great deal. And I could, you know, 10,000 people in a list a year from now, maybe they say they'll put up a couple hundred thousand dollars for X percentage of the company.

Possible?

Sean Smith (17:40.741)
Now, look, we see deals marketed that way plenty, right? And we have not invested in a deal where the searcher, the sponsor has not put any money up to date, but we know it gets done. I would say part of the consideration there, if folks wanted to go that route, would certainly be.

Jon Stoddard (17:45.42)
Yeah.

Sean Smith (18:07.795)
aligning your track record or your background with the business you're going to buy, right? Making sure it's a good fit for your skillset. And also, offering good terms to investors, right? That can be another way to kind of clear that hurdle. You may see a lot of folks who put in more capital into the deal, will kind of...

bring terms for investors down to the lower end of the spectrum. So there's obviously, you know, there's levers you can play with here if you want to commit less capital to your own deal, for example.

Jon Stoddard (18:42.51)
So let me, you brought up a point. What are investors looking for in the sponsor, the operator? What kind of track record is this? I mean, it's easy to say, well, you've been a W-2 in a clerical office. I don't recommend you buying a trucking company.

Sean Smith (18:59.635)
Yeah. Yeah. We touched on this a bit in our, in our kind of earlier show, but the kind of two schools of thought that I think continue to emerge are, you know, on the one hand, you've got sort of a, a searcher or a sponsor that's got great business acumen, maybe more of a generalist skillset coming out of a private equity or consulting type background. Um, but no kind of, you know, specific leadership experience in a single industry.

Right. More of that generalist and business acumen approach for those folks. Right. Yeah, that's a good way to put it. That those kind of folks, the, you know, I would say the prevailing path to raise capital from investors is to find a business that is generally, you know, fairly easy to run, not high inventory levels, not, you know, a tremendous amount of capex, more of a kind of services, you straightforward business model. Right.

Jon Stoddard (19:31.33)
Yeah transferable skills we'll call it just like yeah

Jon Stoddard (19:58.85)
Not like buying a software company requires a lot of coding consistently. Yeah.

Sean Smith (19:58.982)
Sean Smith (20:06.515)
Yeah, something like that, right? R and D expenses, however you want to chalk up cat back something similar. Um, the other kind of school of thought is, you know, let's find a, an operator or the operator, you know, finds a business themselves and, they have, you know, a really strong track record in a single industry, right? They're, they're very strong. you, you know, you said trucking say they're very strong in logistics. They've got a great background, maybe even owned a business in the space before or were.

a general manager to private equity backed company. They know the industry, they've got contacts, they know the business model and operations inside and out. For those folks, you can acquire a much more complex business in that industry and you can get comfortable with that because they have a track record in that space. So think it's really important to kind of think in some of those frameworks, right? If you don't have a really strong background in an industry where there's more complex dynamics.

You probably shouldn't be searching for a business in that industry. You should probably focus on business models that are a bit easier.

Jon Stoddard (21:11.438)
Yeah. Easier to understand. That brings me to a question. A lot of information floating around at X and LinkedIn. What are some common myths about raising equity for SMBs that you keep running into?

Sean Smith (21:26.823)
Yeah, it's a great question.

Sean Smith (21:31.973)
I would say, I don't know whether this is a common myth or not, but I do think there's sort of this concept of investors are looking for a one and a half times to two times step up on their equity. And I actually have spoken a good bit about this, but I do think there's probably schools of thought on this as well, but there's folks that are focused on getting a step up and there's folks that are more focused on kind of the holistic deal structure.

I'd say we're very much in the latter camp, right? I'll give you an example. If you have a deal that has taking 90 % SBA loan to finance the deal and they're raising 10 % of the capital from equity investors, and you offer that person a two times step up, they walk away with 20 % ownership. They gave 10 % of the sources of capital, you give them a two times step up, they've got 20 % ownership.

Jon Stoddard (22:28.13)
And that's usually not at that 10 years. It's usually a five years or whatever the term is.

Sean Smith (22:32.719)
Right. it's right. It's just the step up on their basis invested into the enterprise value. And the challenge there is now you've got, know, if that business was bought at, you know, four or five times, you know, you could have a pretty substantial amount of kind of financial leverage debt to EBITDA on that business. You may have pretty, you know, thin debt service coverage ratios and just a generally risky credit profile for the business.

And investors only own 20 % of that business. So there's just an asymmetric risk reward profile there, not in a good way, right? You're taking a lot more financial risk than you're actually getting compensated for on the deal structure. So that's kind of one, I don't know if I would call it a common myth, but I think it's one thing that people should pay a little more attention to when they're putting these deals together, right?

Jon Stoddard (23:22.936)
Yeah, it goes back to that debt service coverage ratio and, you know, private equity likes the two or higher, but these BDOs from SMB, they all go, it's okay with the 1.25. That's scary.

Sean Smith (23:38.173)
Yep. Yeah. Yeah, it can be. you know, we've we kind of our low end is in that range. So we can get comfortable with pretty low debt service coverage ratios. But frankly, the deals that have passed sort of our margin of safety tests, right, we really want to see a good margin of safety in the deals we do. They're usually up towards that two times debt service coverage, if not even.

Jon Stoddard (23:54.499)
Yeah.

Jon Stoddard (24:01.218)
Yeah, there's, gotta be a room for everyone. Somebody goes like, you you're buying a business and the previous owner was only taking a 75,000 salary, but the area that they live in usually requires 150 and they go, well, we got to add that in too, right? Changes everything.

Sean Smith (24:16.337)
Yep. Yeah. Well, that's why you can never rely on SDE for these, right? You got to really calculate the actual, you know, earnings to investors or ideally you go all way down to the free cashflow, you know, figure two investors.

Jon Stoddard (24:31.31)
Yeah, I got to tell you, we're looking at, one of my students is looking at a deal right now. So the SIM says one thing, the QuickBooks file says another, the tax return says another, and then we go, okay, they're all contradicting each other. This is not, where are we going? Send me the bank statements for the last 12 months. So the bank statements actually show it's making a hell of a lot more money than all three of those show.

because there's just the individuals using it as a personal bank account, which is not illegal.

Sean Smith (25:00.647)
There you go.

Sean Smith (25:04.964)
Interesting. Yeah, and this is that's kind of underpins the importance of a quality of earnings report, right? And one of our criteria, right, we need to see a third party kind of quality of earnings done because to your point, so many business owners use that bank account for things that aren't necessarily business expenses, potentially.

Jon Stoddard (25:11.948)
Yeah.

Jon Stoddard (25:23.502)
Yeah.

So would it, before you put a deal on SMB investor network, would you require a quality earnings? Or a light one at least? Yeah.

Sean Smith (25:31.755)
we would, yeah. So we want to see before we, you know, commit, want to see that the quality of earnings verifies all of the kind of assumptions when they have been making, generally speaking, anything to, guess, to date deals that we've put on, SMB investor network have already had a quality of earnings done. but the way we run our diligence process would be, you know, to, to conduct diligence on the information we have. And then as new information comes in, for example, of

Jon Stoddard (25:41.805)
Yeah.

Sean Smith (26:01.233)
roll forward of a Q of E or a fresh Q of E, we would then go back and check to make sure our assumptions are still valid based on this new information.

Jon Stoddard (26:11.148)
Yeah. All right. Let me ask you another question. How should a buyer structure the terms of the equity raise to make it attractive and fair for all parties? And we talked about, you talked about the step up. We get that, but what does that look like? mean, the assumption I'm working on is like, hey, they're looking for some type of multiple invested capital. They're looking for some number IRR.

What's fair to them? Attractive to somebody on SMB Investor.

Sean Smith (26:47.963)
Yeah, so I think there's a couple good assumptions you can probably make when putting together terms for investors. The first one is that whatever financial projections you're putting together, investors are going to be more conservative than you. So if your financial metrics that

Jon Stoddard (27:04.564)
Yeah. Don't use the word conservative.

Sean Smith (27:09.683)
That probably doesn't need to be said, my point is that if you're assuming that you get to your 30 % IRR and you're growing at 15 to 20 % per year in your projections, so you create investor terms based on that projection, you can almost be certain that investors are gonna be assuming that you're gonna grow the business at three to 4 % per year. So what are the terms? Right, exactly. So what is the...

Jon Stoddard (27:34.296)
The math doesn't math.

Sean Smith (27:38.129)
What do the terms need to look like in order to foot with those more conservative assumptions, right? And I would say that same goes for EBITDA margin assumptions. If you assume you're gonna be able to introduce cost efficiencies that create 5 % more margin, we have in certain cases, we've gotten comfortable with assumptions like that, as long as there's really detailed, almost like.

Jon Stoddard (27:44.557)
Right.

Sean Smith (28:05.689)
line item level planning behind it. And again, going back to kind of the track record discussion, if you can say, you know, I was at McKinsey, I've been integrating &A deals for the past 20 years. We know exactly how to run this playbook and I've done it in this industry a hundred times. Sure. Right. We can probably give you more credit for identifying, you know, those operational efficiencies. But if you're kind of on the other end of the spectrum where you maybe haven't done that so much, you know, you're a newer acquirer, it's going to be a lot harder to give credit for assumptions around.

operational efficiencies. So that's kind of the first piece, right?

Jon Stoddard (28:40.11)
So what about that's okay, that's like, I'm going into an SMB and say, I'm gonna drop GNA 10%. Okay, great, I understand it. You've done it before, you do it again. That's what PE does, right? It goes in there, operational efficiencies. But if somebody goes, I'm gonna grow it 30%, you're definitely gonna be skeptical about that one.

Sean Smith (29:02.867)
Well, I think we can, we're going to be skeptical in general on both sides. Any, you know, substantial assumptions that are impacting cashflow, we're going to be, it's, it's, it's going to be, you know, uh, skeptical until we have kind of enough information to really prove that there's a, there's a clear path to getting there. So sure. If I think on the growth side, the same concept applies. If you said we're going to grow revenue by 30 % in year one.

Here's a list of industry contacts I have personally worked with historically who we've already started talking to and have said they would love to start using our, whatever you name the industry. Right. So it goes both ways, but it does really go back to that track record versus no track record, but a more simple business question.

Jon Stoddard (29:39.342)
They're gonna buy, right? Yeah.

Jon Stoddard (29:51.938)
Yeah. So what are some of the big red flags investors watch for when evaluating a deal? Putting up, you're not going to just put any deal up on investor network. There's going to be somewhere like, no, that's a red flag. That's going to keep you from getting uploaded.

Sean Smith (30:10.833)
Yeah. And we've certainly been, you know, pretty, you know, we've, we've got pretty tight underwriting criteria that we've, that we use to date. I would say, you know, it varies for each investor, but there's kind of three recurring risks that we see almost every and every deal we do. Right. So the first is customer concentration, you know, generally in kind of B2B.

industries or B2G industries, right? You don't see that as much in B2C. If you do something weird is going on, but in kind of, you know, most B2B, B2G industries, you're, especially in like manufacturing, for example, the companies tend to grow with, you know, a single customer, right? Or a few customers. Right. They've got a great contract or they've got great, you know, recurring purchases from that customer. So they continue selling and upselling into that one.

Jon Stoddard (30:59.66)
Yeah, like General Motors or something like one. Yeah.

Sean Smith (31:09.445)
customer and all of a sudden, you've got 40 % customer concentration or something like that. So that's a big one. And you always got to look out for that. When you find that, you've got to ask, what's the nature of that? What's the purchase behavior? there contracts in place? Is the product or service the company's selling mission critical? Can't be switched. Are there high switching costs? All that stuff. So that's how you look at and deal with customer concentration.

And then of course you can mitigate it through deal structure with a forgivable seller note or an earn out, clawbacks to equity, things like that. The second is key person risk. And you see that virtually in all small businesses, right? The seller is almost always going to be a key person, has relationships, just like we talked about with the CPA, professional services example. But you really got to look down the org chart to identify other key people.

Maybe there's other family members in the business that are doing critical tasks. Maybe there's, you know, a salesperson who holds a lot of the relationships and, know, you might miss signing a non-compete with that person because they weren't at the top of the org chart and you weren't thinking about that. So looking at key person risk, not only, you know, from the head of the organization, but also down the org chart. That's really important. And again, you can structure in those kind of forgivable dynamics to the acquisition structure.

through deferred consideration in order to get there and then kind of mitigate some of that. So those are the two biggest ones. I'd say the third one that arises every so often is whether or not the value of the business is truly transferable. And this is similar to key person risk, what we often see is mainly services businesses that are kind of highly skilled.

Jon Stoddard (32:40.792)
Yeah.

Sean Smith (33:07.997)
you know, come up because the individual, the owners is very skilled and, you know, great at that specific, trait and has built a brand around themselves and around, you know, their, their, skills in this, in this space. So when you find a business like that,

Jon Stoddard (33:24.002)
Yeah. Well, it's like the contractor license coming with that too, right?

Sean Smith (33:28.167)
There's a contractor license, sure, but you more see this in, for example, high-end architecture or design or things like that. It's really hard to transfer that personal brand to a new owner. So that's one that's almost like key person risk, exponentially more risky and more challenging to overcome. So I think that's just one worth calling out is the value of the business actually transferable to a new owner.

Jon Stoddard (33:52.75)
Great.

Jon Stoddard (33:58.286)
Gotcha. Have you seen the appetite for SMB investors over the last 12 months? it increasing, continually increasing? I had this conversation with somebody earlier today, like, oh, you know, I want to buy before the silver tsunami. Well, I don't really see the flaws of buying demand taking effect there. Like some of the levers have to go up and down for this hypothesis to be true. I don't see that.

Sean Smith (34:28.251)
Yeah, so interest in investing has, I think, has grown and is continuing to grow substantially. You know, there has been a lot of conversation about, you know, buy a business, it's a passive income strategy. And I think we all know that at least it's become more more clear to many folks if that's not really how it works, right? You need to be pretty engaged.

Jon Stoddard (34:52.076)
Yeah.

Sean Smith (34:56.115)
But what's emerging out of that is a lot of folks who, you know, started looking at this asset class as more of a passive strategy are starting to say, well, there actually is a way to passively invest in small businesses. that's by, right. That's by backing someone who does want to run the business. Right. So I think there's, there's growing interest in the passive investing approach because of some of those dynamics. What I will say is, you know, there's been new

Jon Stoddard (35:09.39)
Cause they don't want to run it. Right. Yeah.

Sean Smith (35:25.319)
kind of guidelines around the SBA that, you know, some, counterbalance each other. know, some make it more challenging to invest if you, you know, aren't, are you a citizen or an lawful permanent resident? So that that's made dynamics for SBA deals pretty challenging. But then on the flip side, you know, there's, there's guidelines around how deals can be structured. And John, you and I have talked about this, you know, but the kind of, you know,

restrictions placed on seller notes and things of that nature may actually drive a greater need for equity, right? And that may drive more capital towards equity investors.

Jon Stoddard (36:02.702)
Hmm, yeah. So let's take an example. Somebody has a deal under LOI. They're a US citizen. They are cleared for an SBA loan. What's the process of uploading? How long does that take? What kind of questions are you asking of them? You get approved. How do they stand out?

I have a little experience with crowdfunding, the big one in LA, where if you don't take off, they put you on page five and you just never fulfill that subscription package. So what's that look like?

Sean Smith (36:41.619)
Mm.

Sean Smith (36:49.683)
Yeah, so for an SMB investor network, if someone submits a deal, if someone submits a deal, we look at it pretty quickly and we aim to get feedback within a week or so of people submitting. If we aren't able to kind of underwrite it for search fund ventures and kind of syndicate it to the platform in earnest, we'll still aim to put you in touch with folks that we think it could be a fit for.

Jon Stoddard (36:53.196)
Yeah, yeah, yeah.

Sean Smith (37:18.227)
And you know, there's other investors on other kind of lead investors on SMB investor network that would that have different mandates than we do, right. And underwrite things differently. So we certainly will kind of circulate the opportunity to others and we won't just leave it kind of in the page five, as you put it, Assuming it, you know, the deal does kind of pass our underwriting criteria, then we would would really partner and kind of syndicate that deal to our network. So we would put

Jon Stoddard (37:25.25)
Right, yeah.

Sean Smith (37:46.737)
search fund venture stamp on it. We do our diligence. We make that available to our investors and make it known that search fund ventures is investing. And, you know, we run outreach to our network to raise for an SPV. So that's really the kind of format and the different ways that we can be supportive.

Jon Stoddard (38:06.094)
So what happens after that? we just, they don't, they don't just put it up there and you leave it alone. Is there some kind of action to keep that interest? Like I know that a crowd street up in the Chicago one, they have on their site, you know, sign up for webinars and somebody, somebody interested in, they could sign up with a webinar and you give these investor presentations to help them out. Yeah.

Sean Smith (38:24.861)
Right.

Sean Smith (38:32.263)
That's exactly right. So yeah, we have a whole kind of program around our syndication effort, right? Oftentimes we'll do kind of a Q &A type video, we'll help kind of socialize and I would say distribute all that to our network, not only through the platform, but through our newsletter. And we really do kind of create a holistic, know, syndication effort around deals that we underwrite. So that is, I would say, a key...

component of partnering with SMB Investor Network on a deal.

Jon Stoddard (39:04.408)
Yeah. And if I was the, the, business buyer and I put it up on there, I'm not just going to leave it. Say, Hey, you guys go do your job and I'll go start, you know, go back to my W2 job. What, what can I do to push more interest? Should I be active on X and LinkedIn and talking about my deal?

Sean Smith (39:25.511)
Yeah, so we always recommend that folks continue to raise the way that kind of they had planned to. And obviously we can help strategize with that. So certainly being vocal to your network, to other networks, and then of course, participating in calls that we'll bring you in on with an interest in investors from SMB Investor Network. So that's sort of the communication plan.

Like I said, we also put together the Q &A videos, of get people, help people get to know you better and really just socialize that deal to folks that could be investors.

Jon Stoddard (40:03.79)
So usually, this, mean, normally you have this LOI under 60 days. So you really need more time than possible. So like, you should be thinking about as soon as they sign that LOI, the deal package goes up to investor, SMB investor network. So you have more time to reach out to these people because somebody may be on vacation, coming back, whatever it is, you you need to cast a wide net and that takes time.

Sean Smith (40:30.587)
I think that's right. mean, the earlier that you can get a deal in front of us so we can take a look and provide feedback, the higher the odds of success of your raise are going to be. If you wait till the last 10 days of your exclusivity period and you haven't been making much momentum and the seller doesn't want to extend or their broker, their lawyers in their ear saying, onto the next, it's going to be really tricky.

Jon Stoddard (40:56.908)
Yeah. But I've seen a lot of deals just recently where they do have like seven days left. And I go, my advice is to go back to the seller and see if you can extend the LOI. Right? Yeah.

Sean Smith (41:09.523)
Yeah, and from what we've seen, as long as you're making progress and there's positive momentum, that usually that request is pretty amenable. But again, we can make a lot more progress and we can be more supportive the earlier we're in. The earlier we get access to the deal. That's right.

Jon Stoddard (41:26.926)
Yeah, more time you have the better chances, increase your chances. So what does that look like to you guys? Are you on the cap table and can take a piece of the action? What does that look like? And I know that Angel List is kind of a standard two and 20 deal. you, thing?

Sean Smith (41:46.587)
Yeah, so essentially what happens is we'll end up writing two checks for a single deal, right? We'll write a check from Search for Inventures, the fund, and then we'll have an SPV, which are folks from SMB Investor Network. Some of Search for Inventures' LPs may participate in that as well. And then we'll write both of those checks to the actual investment vehicle or to the company, right?

The business model, revenue model around it is just a fund model. So we have a management fee and a carry both for the fund and for the SPV that we raise.

Jon Stoddard (42:22.584)
Yeah. What's, is there any types of deals right now that investors I'm assuming you're talking to them and saying, kind of deals would you invest in? And they say what?

Sean Smith (42:36.871)
Yeah, I'd say in many cases, people still really like industrial deals, trade contractors, especially ones that are more niche, more niche kind of services businesses. There's folks that like kind of more niche manufacturing businesses as well. You know, I'd say, frankly, a lot of what we, what has gotten interest within our network is deals that are priced at a good multiple and have high quality revenue.

If you've got those two things in place, you've got a really exciting deal for a lot of folks. Generally, think part of the reason people have skewed towards these industrial sectors is because not only do they have that local economies of scale dynamic I mentioned earlier, which makes disruption harder and competition a little bit easier, but there's a lot of them out there with owners that are ready to retire, meaning you can get them at a decent multiple.

And especially if they're doing maintenance type work, that's really high quality revenue. Yeah. So those are all, I think it's that trifecta that has caused a lot of folks, rightfully so, to be excited about investing in these industrials type businesses.

Jon Stoddard (43:36.236)
A need versus a want, yeah.

Jon Stoddard (43:47.692)
Yeah. So what kind of checks do they write on SMB Investor Network? What size?

Sean Smith (43:53.393)
Yeah, so we have pretty low minimums for people to participate. Investors can participate with as little as 10K. We'll bring that into the SPV. And then generally...

Jon Stoddard (44:04.504)
Do they have, I gotta ask about that. Let me amend that question. And what rights do they have?

Sean Smith (44:12.017)
So their rights are with the SPV, right? So we have a specific LLC basically that we'll gather all those allocations into, and then that LLC will invest into the actual business. So there's kind of that layer between the business and the investors. we will manage, SMB Investor Network manages that SPV and the relationship with all those investors.

Jon Stoddard (44:14.808)
Okay.

Jon Stoddard (44:39.128)
Gotcha. Very similar to Angel List, what they do. Yeah.

Sean Smith (44:42.287)
Exactly. Now the Angel List model is a really good analog. At the end of the day, know, our goal is to democratize investing in this asset class and support acquisition entrepreneurs and small business. And the best way we see in doing that is very similar to this Angel List kind of syndication model.

Jon Stoddard (45:00.174)
All right, so I'm gonna switch seats a little bit, not be the buyer and asking questions about the investor. Why would I wanna be on here and say, yeah, I'd like to take a look at deals. I don't wanna run this business. I don't wanna run a business. I don't wanna manage people. I just wanna invest in people. What does that look like?

Sean Smith (45:17.073)
Yeah, so I mean, you said it right there is the first piece, right? Being able to invest in this asset class as a passive investor is in our minds, a really big value proposition. It's not easy to find these deals. It's not easy to source good quality deals in this space. So that's one. You can have a look at our diligence and how we're thinking about the deal. You can get that perspective. That's two. A lot of people find that pretty valuable.

Jon Stoddard (45:24.439)
Yeah.

Sean Smith (45:45.477)
You know, there's kind of a level of quality there because we've vetted it. So you know that these deals have, you know, roughly 2 % of the deals we see make it through the funnel, at least on the kind of search fund ventures, co-invest on SMB investor network. And, you know, I'd say lastly, that 10K minimum makes it a lot more accessible than, you know, what minimum check sizes generally are in this space, which is closer to call it 100K or so. So those are kind of the...

the top level reasons that folks invest alongside us.

Jon Stoddard (46:17.758)
And if I'm an investor on there and I wanna put money, I'm looking at it just like it has all the SEC requirements placed, the private placement memorandum, subscription agreement, everything, the risks involved, right?

Sean Smith (46:31.409)
That's exactly right. Yep. Yeah. So we have a whole kind of process for making sure that the deals we're supporting from a syndication standpoint are indeed compliant.

Jon Stoddard (46:41.858)
Yeah. Lovely. love, I mean, this is why I'm an advisor on this thing because like, really think that there's so many investors on social media and out there going, Hey, let's invest in, you know, United States businesses, help them grow, help them transition. So I love it.

Sean Smith (46:58.535)
Well, that's what we're doing day in and day out. So glad you love working with us, John.

Jon Stoddard (47:03.886)
All right, I'm gonna 47. I get everything or did I miss something?

Sean Smith (47:12.733)
Got everything in my mind.

Jon Stoddard (47:14.83)
Let me stop that.