What Do Investors Look for in Small Service Businesses?

by Victoria Duff

Two kinds of investors operate in the small business venture capital market: those who are looking to invest in a company that will grow and provide a good return on investment, and those who are more interested in buying into a partnership position with a small company and working with that company in a management or key strategic function.

Venture Capital

If a small service business has the potential for becoming a large business and eventually making an initial public offering (IPO) of stock, it might be of interest to the venture investor who is seeking a large profit. These investors generally look for an attractive exit strategy that involves either selling the company to a larger enterprise or doing an IPO. The qualities needed include a large industry with an underserved niche that the company can fill.


This type of investor is generally an entrepreneur who has sold his business or has retired from a key position in a large company. He is essentially seeking to buy his way into a new career in which he has an active interest. He is looking for a financially sound company with a like-minded management that is looking for an investing partner to help grow the company. Although there may not be IPO or acquisition potential for your service business, there should be the potential for growth into a larger enterprise with good profit margins.

Favorable Characteristics

Management quality is one of the most important characteristics investors consider. Anyone who invests in your company wants to be able to ask questions and make suggestions without getting into a fight with egocentric managers. Other important characteristics are high industry growth potential, early or dominant control of the market for niche services, good financial management, good brand or market image and good business development history. Small service companies grow through providing excellent customer service and outstanding skills in the business sector being served.

Unfavorable Characteristics

Big-ego managers are one of the top deal-breakers in any investment situation. Lack of thorough knowledge of the business sector being served is also a deal killer. If you have lost money or not grown as fast as you would have liked, it can still be acceptable to an investor if the loss stems from under-funding or unforeseen events. If your business difficulties stem from poor financial management, you are unlikely to attract an investor unless you relinquish all financial management control.

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