If you spend enough time talking to SMB owners, one theme comes up repeatedly: operating a small business is hard—the outcomes are unpredictable, and you’re sure to face challenges that you never knew existed. The best way for investors to hedge their risk of investing in a deal is to bet on the operator first and the deal second.

This creates both an opportunity and a challenge for searchers. The opportunity is that investors are actively looking for capable operators to back; the challenge is that you need to demonstrate operational competence in a way that builds investor confidence before you’re sitting in the driver’s seat of your new business.

Are investors betting on the horse or the jockey?

The right operator can solve problems and build value even in imperfect situations, while a weak operator can squander the most promising opportunity.

This represents a fundamental difference from larger private equity deals. While PE shops rely on extensive due diligence, industry reports, and comps, small business investors sometimes are forced to make decisions with incomplete information. In these cases, the quality of the operator becomes the primary risk mitigation strategy.

Daniel Farag of Siwa Capital, whose family office has invested in over a dozen deals, explains their vetting approach, in part, as, “Really, it’s much more about, who’s the entrepreneur? What is the opportunity? What do they see?” And Daniel isn’t alone in his due diligence approach.

“The jockey is every bit as important as the horse…you’re marrying your operator for five to seven years, at least,” echoes Jason Ehrlich of Fruition Capital.

What builds investor conviction

1. Proven operational experience
Investors want evidence that you can handle the messy realities of running a business. This goes beyond having an MBA or consulting experience—they want to see that you’ve managed people, dealt with customer complaints, and handled daily operational crises.

Key experience investors value:

Direct people management and team leadership
P&L ownership and operational responsibility
Customer-facing roles and problem-solving
Experience in blue-collar or service environments
Structured operational roles (including military background)
We asked Stef Fisher-Sample from Pailor Capital, who has 18 years of operating experience, about what she needs to see in a prospective searcher. Her response is direct: “People that have never managed a single person in their life, [I can’t consider] because small business… It’s one people management issue after another.”

Sometimes, the right operating experience doesn’t necessarily have to come from the private sector. The unique challenges you’ll face running a blue-collar business can resemble the leadership experience you’d have from military service. Chris Hartman of 12 South Capital Partners says, “Maybe they’re in the military—just something that tells me that they’re not gonna be scared of working with a blue collar workforce because they’ve [already] done it and want to do it again.”

2. Financial commitment and skin in the game
Beyond operational experience, investors typically want you to have a meaningful financial stake in the deal’s success. This serves two purposes: aligning incentives and demonstrating confidence in your abilities.

While it’s not always practical to invest a meaningful portion of the total equity injected, there are different ways to show your financial commitment. Ultimately, investors want to see that you are going to stick it out when times get tough and have personally contributed as much as you reasonably can, just like they will. You can do this through:

Direct cash investment in the deal
Personal guarantees on SBA debt
Family and friends investing alongside you
Former colleagues or bosses writing checks
Forgoing salary or taking reduced compensation initially
Farag emphasizes: “As much as possible that the searcher can bring actual dollars to the table is critical… If not, then what you want to ask is, is their family investing money? Did their former bosses invest? These are all huge signals.”

3. Self-awareness and realistic planning
The best searchers acknowledge that small businesses are unpredictable and present realistic scenarios rather than overly optimistic projections. They show they’ve thought through challenges and have plans to address them.

What this looks like:

Honest assessment of risks and potential downsides
Realistic financial projections with multiple scenarios
Clear articulation of what you don’t know and how you’ll learn it
Willingness to discuss trade-offs in your strategy
Evidence of learning from past mistakes or challenges
An overly naive call with an investor can appear as if you’re blind to the challenges ahead of you. We asked Niklas James, Founder and GP of Minds Capital: “I like them when they’re more reflective as opposed to salesy in their presentation. I want them to be honest [about the risks] and have reflective thoughts on it as opposed to being pushy and salesy.”

Red flags that kill deals

1. Unrealistic expectations about deal structure and ownership
Many first-time searchers begin fundraising with unrealistic expectations about deal terms and their financing sources.

Common unrealistic expectations include:

Buying businesses with little-to-none of your personal capital
Forecasting unreasonable growth
Providing minimal governance or oversight to the investors
Assuming small business ownership will be “passive”
Taking an above-market salary
Underestimating working capital needs
Farag observes: “I think it’s very toxic to think that all of this is so easy. [What we want to learn is] how much are they actually committed to this? Why are they actually doing this?”

2. Poor capital structure understanding
Over-leveraging acquisitions creates situations where businesses exist primarily to service debt rather than grow and create value. This is particularly problematic when unexpected issues arise in the first year.

Leverage red flags:

Using 90%+ debt financing
Monthly debt payments that consume most cash flow
No equity cushion for unexpected challenges
Unrealistic assumptions about cash generation timing
Ignoring working capital and CapEx needs
“If there’s more than 75% leverage, I just get a little antsy nowadays. I’ve seen the operators pretty much live month to month trying to make sure they can make their huge SBA note payments,” says Hartman.

3. Finance-only background without operating experience
While financial skills are valuable, investors are wary of searchers whose only experience is in finance or consulting, as these backgrounds may not prepare someone for small business realities.

Why this concerns investors:

Small businesses require hands-on management
People management skills often matter more than financial modeling
Customer relationships require emotional intelligence
Operational problems can’t be solved with spreadsheets
Cultural issues can destroy value faster than financial optimization can create it
Fisher-Sample is skeptical of pure finance backgrounds and has seen qualitative aspects bring down businesses before. “The culture can crumble the P&L faster than anything,” she says.

How to position yourself as an investable operator

1. Build relationships before you have a deal
Start building your investor network months or years before you need capital. This allows investors to evaluate you as a person rather than just as a deal.

For Ehrlich, he likes to “form a relationship with a searcher well before there’s ever a deal on the table. We’ve talked to hundreds of searchers and formed relationships with the folks that we believe are gonna be very competent, capable, credible, high-integrity operators.”

Here’s what you can do to begin building your rolodex before a deal is on the table:

Attend industry conferences and meetups regularly
Engage thoughtfully on SearchFunder and social media
Request informational conversations from investors (not pitches)
Join operator communities and investor networks
Provide value before asking for anything

2. Develop a focused investment thesis
Many investors prefer searchers with specific focus areas rather than generalists. This demonstrates seriousness and allows you to develop genuine expertise and networks.

James’ advice on specialization: “Be thesis driven. It helps you filter out deals quicker. You’ll know what your buy box is and all other deals are irrelevant.”

Here’s how you can start:

Choose 2-3 target industries based on your background
Develop geographic focus around where you want to operate
Create materials demonstrating your industry knowledge
Build relationships with industry-specific intermediaries
Articulate why you’re uniquely positioned for this sector

3. Demonstrate scale thinking
Target businesses with growth potential rather than just buying yourself a job. Show you understand value creation beyond maintaining current operations.

James advises searchers to “Think bigger. A bigger deal, a bigger situation might require a [different structure], but in general it requires the same amount of work and it just pays off a lot more.”

What does this mean?

Target businesses with $1M+ EBITDA when possible
Develop clear value creation plans beyond maintenance
Show understanding of operational improvements and growth strategies
Articulate realistic but ambitious goals
Demonstrate knowledge of how to professionalize operations

Finding deals that align with investor preferences

1. Target stable, cash-flowing businesses
Most small business investors prioritize stability and predictable cash flows over growth potential. They want “boring” businesses with defensive characteristics.

Investor preferences:

B2B businesses with repeat customers
Diversified customer bases (typically no customer >15-20% of revenue)
Recurring or repeat revenue streams
Barriers to entry that protect market position
Stable margins and pricing power
For Ehrlich and Fruition Capital, they’re looking for “B2B companies only—boring, stable, old economy type businesses with repeat customer bases. We won’t look at anything that’s heavily project-based, bid-based, businesses that have to go out and re-win that business every year.”

2. Understand geographic preferences
Many investors focus on specific regions based on growth trends, their networks, or where they can add value. Understanding these preferences helps you target the right capital sources.

Sometimes, riding the tailwinds of geographical growth can be a winning formula for small business success.

Hartman explains 12 South’s regional focus: “We predominantly invest only in the Southeast and Mid-Atlantic—just a mediocre business with even a mediocre operator that is in a geographic area that has organic growth happening can outperform potentially even an excellent business in an area that’s declining.”

3. Avoid common deal killers
Certain business characteristics consistently make fundraising difficult, regardless of other attractive qualities.

Businesses to avoid include:

Heavy customer concentration (>20% from a single customer)
Project-based revenue requiring constant rebidding
Businesses dependent on the seller’s personal relationships
Highly cyclical industries
Tech-centric businesses that are vulnerable to disruption
Significant regulatory or licensing risks

4. Investment terms that work
Understanding market-standard terms helps set appropriate expectations and structure appealing deals.

Standard SBA deal terms:

8-12% preferred return to investors
Participating preferred structure
20-40% total equity to investors depending on deal size
Simple waterfall structures
Keep deal structures simple—complex deal terms can signal misalignment and can create confusion with investors. Focus on creating clear partnership dynamics rather than optimizing every detail for your economic benefit.

Tactical investor outreach strategy

1. Prepare professional materials
Essential materials before outreach:

Executive summary highlighting your background and thesis
FAQ document addressing common investor questions
Sample deal structure showing your market knowledge
Industry research demonstrating your expertise
Reference list from credible sources

2. Target the right investors
Research investors who:

Have experience in your target industries
Invest at your deal size regularly
Are geographically aligned with your search
Value operational experience over pure finance backgrounds
Have backed first-time operators successfully

3. Build trust through transparency
Trust is the foundation of successful investor relationships. This means honest communication about challenges and opportunities.

Farag underscores the importance of trusting the operator, “At the end of the day, it doesn’t matter how much formal governance you have, that trust is what drives everything. And so if you can’t trust the person or you get a bad feeling, it’s not worth it.”

Final takeaways for searchers
The small business acquisition ecosystem rewards searchers who approach fundraising with methodical thinking and a genuine partnership mentality.

Key principles:

Lead with operational credibility: People management skills matter more than financial modeling
Commit meaningful capital: Align your interests with investors through real financial exposure
Build relationships early: Start networking before you need capital
Stay realistic on terms: Understand market standards and focus on alignment
Think thesis-driven: Focused approaches signal seriousness and enable better execution
Embrace transparency: Honest communication builds more trust than overselling
Show investors you’re the kind of operator they want to partner with for the long haul, and your fundraising journey will benefit. If you have more questions about what investors are looking for, feel free to reach out to our team here at Mainshares—we’re here to help make your journey as easy as possible!