Why We Typically Prefer Independent Sponsor Deals Over Self-Funded Searches – and What It Takes for Us to Invest in a Self-Funded Searcher
The SMB investing ecosystem is rich with different models — from traditional search funds to self-funded searches to independent sponsors. Comparing SMB Investing Models helps highlight how each approach contributes to the broader landscape of small business acquisitions. Each plays an important role in addressing the massive $5–10 trillion ownership transition underway in the U.S.
At SMB Value Investing Group (SMB VIG), we engage with all three models, but our preferred partner model is the independent sponsor. That said, we also selectively invest with self-funded searchers — provided certain conditions are met.
Here’s why.
Why We Prefer Independent Sponsor Deals
Independent sponsors provide a combination of flexibility, professionalism, and alignment that makes them particularly attractive for LP investors like us.
Deal-First, Capital-Second Approach
- Independent sponsors bring us live transactions rather than raising blind capital.
- This allows investors to allocate capital deal-by-deal, with full discretion.
Professionalization of the Model
- Many independent sponsors are former private equity professionals, investment bankers, or operators with a deep deal track record.
- They know how to structure transactions, negotiate terms, and run efficient diligence processes.
Alignment of Interests
- Sponsors typically earn carry only when investors achieve target returns (often with an 8–12% preferred return hurdle).
- Closing fees and monitoring fees are modest compared to PE fund structures.
Broader Deal Size Range
- Independent sponsors often pursue deals in the $10–100M EV range, beyond the typical $2–20M self-funded search zone.
- These businesses tend to have stronger management benches, more durable revenue bases, and clearer exit options.
Scalability
- Independent sponsors can execute multiple deals over time, building a portfolio-like exposure, while self-funded searchers are usually limited to a single-company career path.
When We Will Back a Self-Funded Searcher
That said, we do invest with select self-funded searchers when they demonstrate the right qualities. Because the model carries higher risk (single-asset concentration, less structured governance, more operator dependence), we apply a higher bar for diligence.
Here’s what we look for:
Exceptional Operator Fit
- Strong leadership, cultural alignment with the target industry, and an ability to inspire and retain employees.
- Prior P&L responsibility, not just financial or consulting backgrounds.
Clear Industry Focus
- We prefer searchers who focus narrowly on one or two verticals, rather than a “boil the ocean” approach.
- Domain expertise (e.g., healthcare services, B2B distribution, niche manufacturing) significantly improves success odds.
Demonstrated Resilience & Grit
- Self-funded searches are lonely, capital-intensive, and often slow.
- We look for personal commitment, perseverance, and resourcefulness in managing the search runway.
Deal Discipline & Process
- Evidence that the searcher can run a professional process: building pipelines, managing intermediaries, and conducting institutional-grade diligence.
- We favor searchers who bring us deals with clean data rooms, clear theses, and reasonable valuations.
Alignment with Investors
- We want clear economic alignment: fair promote (20–40% equity), willingness to co-invest personal capital, and transparent communication.
Our Investment Lens
- Independent Sponsors: Our default preference — professionalized, scalable, flexible, and aligned.
- Self-Funded Searchers: Selective participation — we need to see exceptional qualities in the operator and deal quality before we commit.
- Traditional Search Funds: Less of our focus, though we continue to monitor trends given their long history and proven returns.
Final Thoughts
At SMB VIG, we believe the independent sponsor model represents the most institutional-ready way to access SMB investing today. It balances deal quality, investor flexibility, and professional execution in a way that scales.
That said, great opportunities can also come from self-funded searchers — but only when the operator is highly qualified, the focus is sharp, and the deal process matches institutional standards.
In other words:
● Independent sponsors are our go-to partners.
● Self-funded searchers must pass a higher bar — but when they do, the upside can be tremendous.
At SMB VIG, we actively back both independent sponsors and select self-funded searchers to capitalize on the golden decade of SMB investing.
