Beyond Stocks and Real Estate: Getting Started with SMB Investing

By Nick Bryant

TL;DR — SMB investing offers something stocks and real estate cannot: direct ownership of cash-flowing businesses with tangible assets, minimal correlation to public markets, and entry points starting at $50,000. The baby boomer retirement wave is creating a once-in-a-generation opportunity. Here is how to get started.

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Why Look Beyond Stocks and Real Estate?

Most accredited investors have portfolios concentrated in two asset classes: public equities and real estate. Both have served investors well over long time horizons. But both also carry limitations that become more apparent in mature portfolios.

Public markets are highly correlated. When the S&P 500 drops, virtually every sector drops with it. Diversification within public equities provides less protection than most investors assume. The 2020 and 2022 drawdowns demonstrated this clearly — even "defensive" sectors declined 15-25% in short order.

Real estate has become crowded and capital-intensive. Residential and commercial real estate returns have compressed as more capital has entered the space. Cap rates in major markets sit at historic lows, and the asset class requires significant capital or leverage to achieve meaningful scale. REITs offer liquidity but strip away the control and tax advantages that make direct ownership attractive.

Small business acquisitions offer a different profile entirely. When you invest in an SMB acquisition, you own a piece of a real business generating real cash flow from day one. The business has customers, employees, established operations, and tangible assets. It is not a startup hope or a paper asset — it is a functioning economic engine.

The correlation to public markets is minimal. A plumbing company in Dallas does not trade down because tech stocks are falling. An insurance brokerage in Ohio does not lose customers because the yield curve inverts. This is genuine diversification in a way that most alternative investments do not actually provide.

And right now, the timing is exceptional. More than 10 million baby boomer-owned businesses are approaching transition, creating a supply-demand imbalance that favors buyers. Multiples remain at 3-5x EBITDA for well-sourced deals in the $1-3M EBITDA range — a fraction of what comparable businesses command in the public markets.

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What Is SMB Investing, Exactly?

SMB investing means putting capital into the acquisition of small and medium-sized businesses — typically companies generating $1-10 million in annual revenue and $500,000-$3 million in EBITDA. These are established, profitable businesses, not startups.

The most common vehicles for SMB investing include:

Search funds. An individual operator (the "searcher") identifies, acquires, and operates a single small business. Investors provide the equity capital to close the acquisition. Stanford's research tracks 681 search funds since 1984, with a 35.1% average IRR across the asset class. For a full explanation, see our overview of self-funded search investing.

Independent sponsors. Similar to search funds but with more experienced operators who typically bring existing relationships with lenders and investors. Independent sponsors often do not raise a committed fund — instead, they raise capital deal-by-deal.

Co-investment SPVs. Special purpose vehicles that allow multiple investors to participate in a single acquisition. This is the most common structure for individual LP investors, enabling participation with check sizes of $50,000-$250,000.

SMB-focused funds. Committed capital funds that invest across multiple small business acquisitions, providing instant diversification but with a traditional fund fee structure.

The jargon can be intimidating, but the underlying concept is simple: investors pool capital to help a qualified operator buy and run a profitable small business.

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How Search Funds Work

The search fund model deserves special attention because it has produced the strongest documented returns in SMB investing.

The process follows a predictable lifecycle:

1. Search phase. The operator spends 12-24 months identifying acquisition targets. In the self-funded model, the searcher funds this phase personally. In the traditional model, investors provide $400-600K in search capital.

2. Acquisition. Once a target is identified and diligenced, the operator raises equity capital from investors and secures debt financing (typically SBA or conventional bank loans) to close the acquisition.

3. Operation. The operator runs the business as CEO, typically for 5-7 years. The goal is to professionalize operations, accelerate growth, and increase the value of the enterprise.

4. Exit. The business is sold — usually to a strategic acquirer or a larger PE firm — and proceeds are distributed to investors according to the waterfall.

Stanford's data shows this model working at scale. Across 681 funds studied, the average return is 4.5x invested capital. The asset class has produced a 35.1% average IRR — a figure that compares favorably to virtually any other alternative investment category over the same period.

These are not venture capital-style returns driven by a handful of outliers. The median search fund acquisition generates positive returns, and 74% of independent sponsor liquidity events in the McGuireWoods dataset returned 3x or more to investors.

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What Does It Cost to Get Started?

This is where SMB investing becomes genuinely accessible.

Co-investment minimums through platforms and investor networks start as low as $50,000 per deal. Typical check sizes range from $50,000 to $250,000. This means an investor can begin building a diversified SMB portfolio with a total commitment of $500,000-$1,000,000 spread across 10-20 deals over several years.

Compare this to traditional private equity, where minimum fund commitments are typically $1-5 million for a single blind-pool allocation with no deal-level discretion.

There are no management fees on uninvested capital. Because you invest deal-by-deal, your capital only goes to work when you find an opportunity you believe in. There is no fee drag on committed but undeployed capital — a meaningful advantage over traditional fund structures. For a detailed comparison of fee economics, see our breakdown of SMB private equity fee structures.

The time commitment is real but manageable. Evaluating individual co-investment opportunities requires reading deal memos, reviewing financials, and assessing operator quality. Plan for 3-5 hours per deal evaluation, with 1-2 deals per month worth serious consideration. If you prefer a more passive approach, SMB-focused funds offer diversification with less hands-on involvement.

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The Risk-Return Profile

SMB investing is not venture capital. It is not a lottery ticket with a binary outcome. But it is also not risk-free, and investors should understand the profile clearly.

What makes it different from venture: You are buying existing, profitable businesses — not funding ideas. Cash flow exists from day one. The businesses have customers, revenue history, and proven operations. The risk is not "will this work?" but rather "can the new operator sustain and grow what already exists?"

The return data is encouraging. Stanford's 35.1% average IRR and 4.5x average ROIC represent the broadest dataset available. McGuireWoods' independent sponsor data shows that 74% of liquidity events returned 3x or more. These returns are driven by a combination of reasonable entry multiples, operational improvement, debt paydown, and eventual exit at higher multiples.

The risks are real and specific. Operator risk is the single largest variable — the success of the investment depends heavily on the individual running the business. Customer concentration, key employee retention, and transition execution are all meaningful concerns. For a comprehensive risk framework, see our guide on managing risk as an LP investor.

Diversification is the primary risk mitigation. No single small business investment should represent a material portion of your portfolio. Building across 20-30 positions — varied by sector, geography, operator, and vintage — smooths returns and reduces the impact of any individual loss. This is the most important principle for SMB investors to internalize.

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Five Steps to Get Started

For investors ready to explore SMB investing, the path forward is straightforward.

1. Educate yourself. Start with our Foundational Guide to Self-Funded Search Investing — a free 24-page resource covering deal mechanics, capital structures, return benchmarks, and evaluation frameworks. Understanding the model before committing capital is essential.

2. Define your investment criteria. What check sizes can you commit per deal? What sectors interest you? How many deals do you want to evaluate per year? What is your total target allocation to SMB? Having clear criteria before seeing deal flow prevents emotional decision-making.

3. Join an investor network. Access to quality deal flow is the primary bottleneck for most SMB investors. Platforms like SMB Investor Network aggregate and curate opportunities from self-funded searchers and independent sponsors, providing a steady pipeline of evaluated deals. Create your investor profile to start receiving deal flow.

4. Start with co-investments. Your first 3-5 investments should be co-investments alongside experienced lead investors. This allows you to learn the diligence process, observe operator evaluation in practice, and build pattern recognition — all while deploying capital at relatively small check sizes.

5. Build your portfolio over time. Resist the urge to deploy your entire allocation quickly. The best SMB investors build their portfolios over 3-5 years, adding 4-8 positions annually. This vintage diversification provides natural protection against any single-year cohort underperforming.

Before committing capital to any deal, prepare yourself with the right questions to ask a search fund operator. The quality of your diligence will determine the quality of your returns.

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The Window Is Open

The convergence of baby boomer retirements, SBA lending availability, and the maturation of the search fund model has created an investable moment that will not persist indefinitely. As more institutional capital discovers the SMB space, entry multiples will rise and the information advantage that early-mover investors enjoy will erode.

The best time to start building your SMB portfolio is now. The second-best time is next quarter. But waiting years means watching from the sidelines as the most favorable conditions in SMB acquisition history play out.

Download the free investing guide to build your foundation, then join the network to start seeing real opportunities.

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Nick Bryant is Co-Founder of Search Fund Ventures and the SMB Investor Network, where he works to connect accredited investors with lower middle market acquisition opportunities.