Why Proprietary Sourcing Is Becoming the Only Path to Reasonably Priced SMB Deals

By Sean Smith, Managing Partner, Search Fund Ventures

TL;DR — Multiples in the SMB market continue to drift upward, and broad-auction deal flow is increasingly priced at levels where returns compress fast. The only reliable path to buying at rational valuations is building sourcing advantages—proprietary outreach, curated platforms, and network-driven deal flow. Independent sponsor data reinforces this: the groups generating the best returns are the ones accessing under-marketed opportunities.

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Executive Summary

For searchers and independent sponsors—especially those pursuing a niche thesis—proprietary deal sourcing is rarely "extra credit." It's a compounding asset that can materially improve access, price, and fit versus relying solely on fully marketed processes.

Why This Matters

The practical problem in lower middle market acquisitions isn't that no deals exist. It's that the subset of deals that are (a) healthy, (b) appropriately priced, and (c) structurally compatible with a search fund / independent sponsor model often clears through intermediated channels fast—and with predictable competitive dynamics.

That reality shows up in how active buyers actually source. In Axial's 2025 Independent Sponsor Report, respondents emphasized running multiple channels at once, with heavy use of sell-side intermediaries and substantial use of proprietary outreach as part of a diversified origination strategy.

At the same time, most accredited investors who back ETA and deal-by-deal private investments are underwriting a combination of (1) business quality, (2) entry valuation, and (3) the operator's ability to execute. In that equation, sourcing is the earliest "control point"—and one of the few that can improve before you even own the asset.

(As a reminder: "accredited investor" eligibility for many private offerings is defined under Rule 501(a) of Regulation D, with common individual thresholds based on income or net worth, among other qualifying categories.)

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Core Concept: Proprietary Sourcing Compounds

The central claim is straightforward: some searchers conclude proprietary sourcing isn't worth the effort, but for niche-focused buyers, that's often backwards. The key word is compounding.

Proprietary sourcing is not just "cold outreach." It's the long, slow creation of relationship inventory:

• Owners who now recognize your name and your thesis
• Service providers who understand what you buy (and what you don't)
• Operators and industry people who begin to pattern-match introductions
• Intermediaries who learn you close (and don't retrade)

Over time, that inventory produces outcomes that simply don't show up in month one:

• the owner who circles back after two years—right when the pain of selling becomes real
• the "river guide" (industry connector) who introduces a seller quietly exploring an exit
• the banker or broker who sends the pre-market whisper because you're credible and decisive

This is what we call increasing your surface area of luck. It's not magical thinking; it's a probabilistic argument: more real relationships, nurtured over time, create more non-obvious deal access.

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Logic (Walkthrough)

1. Proprietary sourcing is an asset that grows—even when you don't close

Most buyers mentally account for sourcing like an expense line: time, tools, travel, list-building, and awkward conversations.

A more accurate mental model is a balance sheet:

• You're accumulating trust (owners, advisors, operators)
• You're accumulating information (who is tired, who has a key-person issue, who has a successor problem)
• You're accumulating option value (a future deal that doesn't exist yet, until it does)

Even if you don't buy a company this quarter, you may still be building the pipeline that makes a well-priced, well-fit transaction possible later.

2. "Reasonably priced" is often a channel outcome, not just a negotiation outcome

Traditional search investors have long been willing to fund the search process because differentiated access can translate into better entry dynamics (and sometimes better partnering dynamics) over time.

But in 2026, we should be candid: price is often set by process.

When an asset is fully marketed, there's frequently: more buyers, more deadlines, more "apples-to-apples" comparison, and less room for patient structure. By contrast, in relationship-driven or lightly marketed situations, the buyer can sometimes compete on certainty, fit, and values—not just price.

Supporting benchmarks (e.g., Q2'25 multiples 3.3x TTM EBITDA; 64% of independent sponsor deals at 4–6x; 73% citing boutique banks and brokers; 74% of liquidity-event sponsors with 3x+ returns) point in the same direction: access and entry valuation are tightly linked to how the deal is sourced and how "public" the process becomes.

3. The best sourcing strategy is usually "multi-channel," but the highest-ROI channel is often relationship-based

A mistake is treating proprietary sourcing as a moral crusade ("brokers are bad; off-market is good"). That's not sophisticated underwriting.

In practice, high-functioning acquirers tend to run multiple lanes:

• intermediaries (brokers, boutique banks)
• proprietary / direct-to-owner
• referrals via service providers
• networks (operators, industry executives, other sponsors)

Axial's 2025 Independent Sponsor Report reflects that diversified reality. The nuanced takeaway:

• Intermediaries are often the highest-volume channel.
• Relationship-driven proprietary and semi-proprietary channels can be the highest-leverage channel (especially for niche theses), because they can produce a non-consensus deal with fewer bidders and a more flexible path to close.

4. Moving up-market changes the game—and can compress sourcing advantages

As deal size increases (>$10M EBITDA), you typically see: more institutional coverage, more standardized banker processes, more efficient price discovery, and more buyers who can pay up (or who have a cost-of-capital advantage).

That doesn't make proprietary sourcing irrelevant—but it often reduces the relative advantage of being "the relationship buyer," and it can push outcomes toward higher multiples and more formal auctions. The smaller and more idiosyncratic the target, the more proprietary sourcing can matter—particularly when the buyer's thesis is narrow.

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Practical Applications

For investors: what to diligence in a searcher's (or sponsor's) sourcing engine

If you back ETA operators, you're implicitly underwriting their ability to originate, not just operate. A practical diligence checklist:

Channel strategy

• What percentage of outreach is thesis-driven vs broad?
• How are brokers and boutique banks approached—systematically, or opportunistically?
• Who are the "river guides" (industry connectors) and how are they engaged?

Process discipline

• Is there a real CRM with activity tracking, or a spreadsheet that dies in week six?
• What is the follow-up cadence (30/60/90/180 days; annual touchpoints)?
• Are interactions logged with next actions and context?

Proof of compounding

• How many owner conversations have happened over the last 90 days?
• How many re-engagements occurred from prior quarters?
• How many referrals came from non-obvious nodes (accountants, attorneys, lenders, operators)?

The key question isn't "How many NDAs did you sign?" It's: Is the sourcing flywheel producing warmer, more proprietary looks over time?

For searchers and sponsors: underwriting your own sourcing like a portfolio

Proprietary sourcing becomes less painful when you treat it like a portfolio with expected variance:

• A large number of outreach attempts will fail quickly.
• A smaller number will turn into real conversations.
• An even smaller number will become "keep-warm" relationships.
• A tiny number will become deals—often later than you want.

The operator mistake is judging the strategy too early. The investor mistake is funding a search while ignoring whether the sourcing approach has any durable edge (especially for a niche thesis).

For operators post-close: proprietary sourcing doesn't stop at platform acquisition

Even after a platform deal closes, the same compounding logic can apply to: add-on acquisitions, recruiting key managers, customer and channel partnerships, supplier negotiations. Relationship equity built during the search phase often becomes operational leverage later—because the operator is already known in the ecosystem.

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Decision Lens (Stress Test)

Stress test #1: What if proprietary sourcing produces no deal in the search window?

If proprietary sourcing doesn't convert fast enough, the common failure mode is not "no deal." It's defaulting into a competitive brokered process under time pressure. Time pressure tends to reduce: selectivity, negotiating leverage, willingness to walk.

For investors, this is why pacing and governance matter. For searchers, it's why consistency (and a long follow-up horizon) is not optional—it's the mechanism by which compounding shows up.

Stress test #2: What if the only deals available are fully marketed at higher multiples?

Even small changes in entry multiple can matter. Illustrative example:

• $2.0M EBITDA at 5.0x = $10.0M enterprise value
• Same business at 6.0x = $12.0M enterprise value

That extra $2.0M can cascade into: higher required equity, tighter debt service coverage, less flexibility for reinvestment, and more fragility if earnings soften. Sourcing is upstream of capital structure risk.

Stress test #3: What if "proprietary" just means "less prepared seller"?

Some off-market situations are off-market for a reason: messy books, unclear add-backs, customer concentration, deferred capex, unrealistic seller expectations. Proprietary access is not a substitute for diligence. It often requires more diligence work because the information room is thinner and the narrative is less polished.

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Caveats (Other Perspectives)

1. Brokers and boutique banks can be the fastest path to quality. Intermediaries often bring pre-screened opportunities and sellers who are genuinely ready. Ignoring intermediaries can be self-sabotage.

2. Not every buyer has the right "niche" for proprietary sourcing to pay off. If a thesis is too broad ("good businesses under $5M EBITDA"), proprietary outreach can become noisy and undifferentiated—leading to low response rates and weak referral dynamics.

3. Proprietary sourcing can become a procrastination strategy. There's a difference between patience and avoidance. If a searcher is "building relationships" but not tightening criteria, improving underwriting, or increasing close capability, the compounding story becomes an excuse.

4. Moving up-market can reduce edge. Above certain EBITDA thresholds, price discovery becomes more efficient and sourcing advantages can compress. The "relationship buyer" still matters—but less than in smaller, less intermediated parts of the market.

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Conclusion

Proprietary deal sourcing is difficult, slow, and often expensive—especially early. But for niche-focused searchers and sponsors, it behaves like a compounding asset: a growing base of relationships and trust that can surface opportunities well before (or outside) a formal sale process.

The punchline holds: the best outcomes often come from patience, consistency, and a deliberate effort to increase your surface area of luck. In ETA and lower-middle-market investing, that "luck" is frequently just the delayed payoff of a well-run sourcing flywheel.