SMB Acquisition Through The Operator's Lens

You've found a business that looks good on paper. The seller's CIM tells a compelling story. Revenue's been growing. Margins seem healthy. The asking price feels reasonable against the cash flow. You're ready to move.

But here's the question that separates successful acquisitions from expensive lessons: Are you evaluating this business like an analyst reviewing a spreadsheet, or like someone who's actually going to run it?

That distinction matters more than most first-time buyers realize. According to Stanford's 2024 Search Fund Study, 31% of acquired companies generate losses for their investors, with over a third of those being total losses. The causes aren't mysterious. They're predictable. And they're almost always rooted in things that spreadsheets and other static documents don't capture.

The Diligence Gap Nobody Talks About

Here's a statistic that should concern you: Elliott Holland of Guardian Due Diligence estimates that for 99% of small-to-medium business deals, the Quality of Earnings report represents the entirety of the due diligence performed.

Think about that. Buyers spend $15,000 to $50,000 validating that historical earnings were real. Then they bet their careers and capital on the assumption those earnings will continue. Without ever pressure-testing that assumption.

Quality of Earnings analysis is essential. It answers whether the seller's numbers hold up, whether EBITDA add-backs are legitimate, whether there are accounting irregularities you need to know about. What it doesn't answer is whether customers will stick around after the owner leaves. Whether the competitive moat is real or imagined. Whether that key salesperson is already interviewing elsewhere.

These aren't edge cases. A study by Stanford MBA Benjamin Kessler examining failed search funds found that 72.7% involved industries with low or negative growth, 63.3% involved operations more complex than the buyer understood, and 40.9% had dangerous customer concentration. Notice what's missing from that list: "The financials were wrong." Financial surprises happen, but operational and commercial blind spots cause far more carnage.

"I Know This Industry. I Don't Need Commercial Due Diligence."

This might be the most dangerous sentence in acquisition entrepreneurship.

Industry expertise is genuinely valuable. It helps you evaluate opportunities faster, ask better questions, and ramp up more quickly post-close. But it can also create a specific kind of blindness.

When you know an industry well, you tend to assume the business you're buying operates the way you expect businesses in that industry to operate. You fill in blanks with your mental model rather than the company's actual reality. You hear what the seller says and unconsciously translate it into what makes sense to you.

Consider a real pattern that plays out repeatedly: An experienced sales executive acquires a company in their industry. They assume customer relationships work the way they've always seen them work. Six months post-close, they discover that the previous owner had unique personal relationships with three key accounts that represented 45% of revenue. Those relationships don't transfer. The customers start taking calls from competitors. Revenue drops 30% in year one.

The buyer wasn't dumb. They were experienced. That experience just happened to make them confident about things they should have verified.

David W. Schroeder, an Operating Partner at Baird Capital, puts it bluntly: "Good customer due diligence allows us to leverage some of the positive aspects of a company while surfacing competitive risks and exposures at the same time." PE firms with billions under management and deep industry expertise still conduct voice-of-customer research on every deal. They do this because they've learned that assumptions, even informed ones, are expensive.

Your industry knowledge should make your diligence more efficient, not less thorough. You know which questions to ask. That's an advantage. Use it to probe deeper, not to skip steps.

"I Can't Afford Commercial Due Diligence."

Let's do the math on this one.

Say you're acquiring a business for $2 million. You're putting down $200,000 of your own money and financing the rest through SBA. Commercial due diligence might cost you $10,000 to $25,000 depending on scope.

If that diligence uncovers a customer concentration problem, a competitive threat, or an owner dependency issue that causes you to renegotiate the price down by 10%, you've just saved $200,000. If it causes you to walk away from a deal that would have failed, you've saved your entire investment plus years of your life.

Now flip it around. If you skip commercial diligence to save $15,000 and the deal goes bad because of something you would have caught, what's the actual cost? Your $200,000 down payment. The opportunity cost of 2-3 years running a failing business. The personal guarantee on your SBA loan. Your reputation with investors if you have them.

The math isn't close.

But here's what really happens: buyers don't consciously decide commercial diligence isn't worth it. They run out of time. They run out of bandwidth. They're already stretched thin managing the QoE process, working with lawyers, negotiating with lenders, and trying to keep their day job while all this happens. Adding another workstream feels impossible.

This is a real constraint, and it deserves a real answer. The solution isn't to somehow find more hours in the day. It's to bring in help that can run commercial diligence in parallel with your other workstreams, synthesize findings into actionable insights, and give you a clear recommendation rather than a 50-page report you don't have time to read.

"The Seller Seems Trustworthy. I Don't Want to Offend Them."

Sellers are often genuinely good people who built something real and want to see it continue. That doesn't mean they see their business clearly.

Every owner has blind spots about their company. They've been inside it so long they can't see it from the outside. They genuinely believe their key employee would never leave. They genuinely believe their biggest customer is loyal to the business, not to them personally. They genuinely believe the competitive threat on the horizon isn't serious.

They're not lying. They're just wrong about things they don't know they're wrong about.

Ben Holland, founder of Satrix Solutions, frames it this way: "Financials can tell you what happened, like revenue churn or growth rates, but rarely explain why. Customer feedback fills in those blanks with real-world context."

Professional due diligence isn't adversarial. It's clarifying. When you talk to customers directly, you often hear things that confirm the seller's narrative. Great. Now you have independent validation and can move forward with confidence. Sometimes you hear things that contradict it. Also great. Now you can ask informed questions, renegotiate terms, or walk away before you've committed.

Sophisticated sellers understand this. They've often been through acquisitions themselves, either as buyers or on the other side of PE transactions. They expect professional diligence. If a seller is offended by your desire to verify their claims, that's information too.

"I'll Figure Out the Operational Stuff After I Close."

This is the most common mistake, and it's rooted in a reasonable-sounding logic: I can't know everything before I buy, so I'll learn as I go and fix problems as I find them.

The trouble is that some problems can't be fixed. Or can only be fixed at enormous cost. Or take years to fix while the business bleeds cash.

Customer concentration is a good example. If you discover post-close that 40% of revenue comes from two accounts, you can't quickly diversify that away. Acquiring new customers takes time. Building new relationships takes time. Meanwhile, you're operating with a sword hanging over your head, knowing that one phone call from either of those customers could crater your business.

Owner dependency is even harder. Class VI Partners reports that owner dependency is the number one risk factor in 95% of middle-market deals. If the previous owner was the face of the business, the primary sales relationship, and the person customers trusted, you can't just step into that role overnight. The research on key person risk suggests the value discount can range from negligible to 100% of enterprise value, depending on severity. In other words, some businesses are literally worthless without their owner.

These aren't problems you fix post-close. They're problems you identify pre-close, price into the deal, plan around, or use as reasons to walk away.

The Yale School of Management's case study on search fund diligence puts it plainly: "Diligence is the final step in what will be a multi-million-dollar investment for investors and a personal bet for searchers that can be a decade long or more." Treat it accordingly.

What the Operator's Lens Actually Looks Like

So what does it mean to evaluate a business like you're going to run it?

It means asking different questions. Not just "Is this EBITDA number accurate?" but "What happens to this EBITDA when the owner leaves?" Not just "What's the revenue trend?" but "Why do customers buy from this company instead of the alternatives?" Not just "What are the margins?" but "What would it take to maintain or improve these margins under new ownership?"

It means talking to customers. Not the three references the seller provided, but a broader sample that includes recent churned customers, long-tenured accounts, and newer relationships. You want to understand why people buy, what they'd do if the business disappeared, and how they feel about the ownership transition.

It means evaluating people, not just positions. Who are the key employees? What's their relationship with the current owner? Have they been through ownership transitions before? What would it take for them to stay, and what might cause them to leave? One in five employees resign over cultural issues with new ownership according to retention studies. You need to know who's in that risk pool before you close.

It means stress-testing the moat. What actually prevents competitors from taking this business's customers? Is it relationships, switching costs, proprietary technology, regulatory barriers, or just inertia? How durable is that advantage? What would erode it?

It means understanding the operational reality. Not the org chart, but how work actually flows. Where are the bottlenecks? What processes live in the owner's head? What happens when something goes wrong? Where does tribal knowledge reside, and how would you capture it?

Warren Buffett's principle, often cited in search fund circles, captures the philosophy: "When a manager with a reputation for brilliance takes on a business with a reputation for bad economics, it is the reputation of the business that remains intact."

Your job in diligence is to figure out what the business's economics actually are. Not what they appear to be in a spreadsheet. Not what they could be if everything goes right. What they actually are, today, and what they're likely to be under your ownership.

The Stakes Are Personal

Large private equity firms can absorb failed deals. They have portfolios. They have institutional capital. They have teams to manage workout situations.

You don't.

If you're a first-time searcher, this acquisition is probably the single largest financial decision of your life. You're betting your savings, your time, your earning potential for the next decade, and possibly your personal guarantee on an SBA loan. The asymmetry is brutal: a successful acquisition changes your life trajectory, but a failed one can set you back years.

That asymmetry demands a different approach to evaluation. Not paranoia. Not paralysis by analysis. But a rigorous, eyes-open assessment of what you're actually buying and what it will take to succeed.

Rick Ruback and Royce Yudkoff of Harvard Business School, authors of the foundational guide to buying small businesses, emphasize this point. In interviews, Yudkoff has observed that searchers who fail often "bought highly cyclical businesses, put a lot of operating leverage and financial leverage on them, and had a very limited capital structure." They took on risk they didn't fully understand.

The operator's lens isn't pessimistic. It's realistic. It's the difference between hope and planning.

How Noris Advisory Helps

At Noris Advisory, we approach every engagement with the operator's lens because we've been in the buyer's seat ourselves.

We provide commercial due diligence that goes beyond financial validation to examine market position, customer relationships, competitive dynamics, and operational reality. We talk to customers, poke holes in assumptions, and pressure-test the moat. We don't give you a document full of maybes. We give you a clear signal: move forward, renegotiate, or walk away.

For deals that move forward, we write SBA-ready business plans with narrative and projections aligned to lender expectations. And we stay engaged post-close to ensure the transition plan gets implemented and early performance matches the investment thesis.

Our pricing aligns our incentives with yours: a monthly retainer credited toward a success fee at closing. If the deal doesn't close, our exposure is limited too.

If you're evaluating an acquisition and want a second set of eyes, one that looks at the business like an operator rather than an analyst, we'd welcome the conversation.