Consolidation Play in the SME Market

Written by Sonakshi Pratap, Founder of Kapso

Ever wondered how deals actually get done in India’s SME market?
At Dealflow IQ, we go behind the scenes with the people making it happen. This week, we feature Sonakshi Pratap, founder of KAPSO, a boutique investment bank that's helped close 80+ SME transactions across India. In this piece, Sonakshi unpacks her decade-long journey navigating unstructured markets, legacy-run businesses, and the evolving world of SME M&A. She also shares sharp insights on where the space is headed next. Whether you're an investor eyeing new opportunities or a professional looking to decode the SME landscape, this one’s for you.

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I started Kapso in 2013 along with my co-founder. At the time, there was no structured market for SME M&A in India. What we were doing was essentially business broking. The term isn’t commonly used here, but that’s what it was.

There were no pitch decks. No data rooms. Just a founder, usually in his 60s or 70s, running a ₹30–₹50 crore revenue business, looking to exit. No professional management, no formal systems. The business ran on relationships, routine, and years of doing things a certain way.

Buyers were usually from the same background. Mostly Marwari families, sometimes Gujarati. For them, the idea was simple: buy a business to ‘settle’ a son into something steady. I’ve worked on over 80 such transactions across India in places like Rajkot, Surat, Daman and Aurangabad.

Back then, the problem we were solving was straightforward: how do we help this founder exit in a clean way?

One deal I remember vividly, involved a silver articles manufacturer. Maheshbhai was in his sixties. His two daughters were settled in the US. He wanted to step away but didn’t want to shut the business. There was no one in the family to take it forward.

The buyer, Kunal, was also Marwari. He had tried his hand in the family business, real estate, and even a stint in Dubai - but nothing quite worked out. So, his father decided to settle him. They decided to buy something that was already up and running.

On paper, it looked like a simple match. But these deals are never as simple as they look.

Maheshbhai kept everything in a diary. Kunal wanted to bring in software from day one. Maheshbhai didn’t want to let go of his staff. Kunal wanted to reduce headcount and bring in his people. They even argued over who would sit in the main cabin. Maheshbhai said, “Main jab tak yaha hoon, kursi meri hi rahegi.”

We ended up structuring a two-year mentorship. Maheshbhai stayed on and trained Kunal - on clients, vendors, credit cycles, and how to manage the existing team. That’s how most of these transitions actually work. Not through legal frameworks or integration plans, but through time, trust, and familiarity. It’s more like an apprenticeship.

Over the last two years, the nature of these conversations has started to shift.

Earlier it was, “Can you help me sell this one business?” that triggered the transaction.

Now, more often, it’s, “We want to buy eight or ten companies in this space. Can you help us build a pipeline?”

Buyers today aren’t just looking at single assets. They’re thinking in clusters. In platforms. In roll-ups. And I think that is where we’re headed.

This is happening across sectors like textiles, packaging, auto components, and light engineering. The buyers include family offices, small PE firms, and upcoming search funds, many of them backed by operators who want to run these businesses themselves.

The idea is to acquire multiple small but profitable businesses in the same sector, standardise operations, and build scale. It’s not a new idea but in India’s SME segment, it’s only now starting to gain real momentum.

There are a few reasons this shift is happening now.

Founders are retiring. The next generation doesn’t want to take over. Most businesses are functional, but under-managed. Valuations are still reasonable, usually between 4 and 6 times EBITDA. Many companies come with real assets like land, machinery, and deep-rooted vendor and customer relationships. On the other side, operator-led capital is more available and more willing to engage with this layer of the economy.

Earlier, this wasn’t a space most investors were paying attention to. I think that’s changed. The supply was always there. Now, demand is building.

Where most roll-ups fail in this space isn’t in the financial side. It’s in the handover. These businesses run on informal systems and personal relationships. The founder knows which supplier will extend credit and which one won’t. The accountant has been around for twenty years. Customers are used to calling the owner directly.

You can’t walk in and professionalise everything on day one.

The buyers who do well here understand that. They keep the founder involved for a year or more. They stay focused on one sector. They spend time understanding how the business actually works before introducing change.

The ones who succeed, in my opinion, tend to do four things well. 1) They stick to one vertical. 2) They allow processes to evolve slowly. 3) They prioritise real operational improvements over optics. 4) And they don’t break what’s working just to make things look organised.

This isn’t a quick flip in any form.

Over the last two years, I’ve also been working with a sizable pre-IPO fund (after Kapso merged with their parent entity), where we focus on sourcing pre-IPO manufacturing deals. This experience has steadily reinforced what I already believed. Consolidation is the bridge. Most standalone SMEs aren’t IPO-ready. But if you bring together five or ten of them in the same space, put in basic systems, and professionalise the operations, you can build something that’s both scalable and ready for public markets. This will too, increasingly become the trend in the coming years.

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By Sonakshi Pratap (https://www.linkedin.com/in/sonakshi-pratap/)