How We Invest with Discipline, Alignment, and Conviction
At SMB Value Investing Group (SMB VIG), we invest alongside independent sponsors and self-funded searchers with a singular objective: to responsibly compound capital through well-underwritten small and medium-sized business acquisitions.
Our diligence process is the cornerstone of this approach. It is designed to identify durable, cash-flowing businesses, assess alignment with sponsors and operators, and surface risks early—before capital is committed.
We view diligence not as a hurdle, but as a risk-management and decision-making discipline that protects downside while preserving upside.
1. Sponsor & Operator Evaluation
People Come First. Always.
Independent sponsors and operators play a decisive role in SMB outcomes. Before underwriting a business, we spend significant time underwriting the individuals behind it.
We assess:
Relevant Experience & Judgment
Prior operating, investing, or industry experience that directly translates to the target business.
Motivation & Ownership Mindset
A long-term orientation toward stewardship, not short-term financial engineering.
Alignment of Incentives
Meaningful personal capital at risk, with economics structured so sponsors win only when investors win.
Character & Integrity
Transparency, intellectual honesty, and the resilience required for SMB ownership.
This evaluation is informed by reference checks, prior deal reviews, structured questionnaires, and direct working sessions with the sponsor.
2. Business Fundamentals
Durable Cash Flows and Margin of Safety
We focus on businesses that exhibit resilience through cycles and operational simplicity. Our underwriting centers on:
Historical Financial Performance
Revenue quality, EBITDA sustainability, working capital dynamics, and cash conversion.
Customer & Revenue Concentration
Dependency on key customers, contract terms, churn, and switching costs.
Industry Structure & Competitive Positioning
Market fragmentation, barriers to entry, pricing power, and secular tailwinds or headwinds.
Organic & Inorganic Growth Levers
Operational improvements, pricing discipline, professionalization, and bolt-on acquisition potential.
Our objective is to understand how the business truly makes money – and what could threaten that reality.
3. Independent Diligence Workstreams
Assumptions Must Be Pressure-Tested
To introduce objectivity and rigor, we rely on third-party diligence where appropriate:
Quality of Earnings (QoE)
Validates normalized EBITDA and uncovers one-time or non-recurring items.
Legal & Regulatory Review
Identifies contractual risks, compliance gaps, and contingent liabilities.
Operational Diligence
Evaluates systems, processes, scalability, and key operational risks.
Commercial Diligence
Assesses customer behavior, competitive dynamics, and market sustainability.
External diligence ensures decisions are based on verified facts—not optimistic projections.
4. Capital Structure & Risk Management
The Right Deal Can Fail with the Wrong Structure
We place significant emphasis on downside protection and conservative leverage.
Key considerations include:
Prudent Use of Leverage
Balancing SBA debt, senior financing, seller notes, and equity to preserve flexibility.
Scenario & Sensitivity Analysis
Stress-testing performance under downside, base, and upside cases.
Structural Protections
Covenants, escrows, seller rollover equity, earn-outs, and governance rights.
Our goal is not maximum leverage—it is maximum survivability.
5. Investment Decision & Ongoing Partnership
Transparency Before Capital. Support After Closing.
All findings are distilled into a comprehensive Investment Memo, shared with SMB VIG syndicate members. We clearly articulate:
- Investment thesis and return drivers
- Key risks and mitigants
- Capital structure and downside scenarios
Once invested, we remain actively engaged, supporting sponsors and operators through governance participation, strategic input, and access to capital and resources.
Why This Matters
Diligence at SMB VIG is not about quick decisions—it is about applying a disciplined investment process focused on alignment, rigorous analysis, and risk management.
By combining value-investing principles with deep sponsor partnerships, SMB VIG seeks to deliver strong, risk-adjusted returns.
Independent sponsors, searchers, and investors are invited to contact SMB VIG to learn more about our investment process and partnership opportunities.
