Soft Magnetic Composites (SMC) consist of pure iron particles with an inorganic phosphorous coating and an additional iron oxide layer at the boundaries between them. It should be specified if the iron oxide is at the boundary of iron and the phosphorous coating or at the outer layer. It is assumed that it's a layer between the iron and the phosphorous layer. This combination of “ductile” and “brittle” constituents represents a challenge for preparing a specimen suitable for both microstructural and micromechanical studies. In particular for micromechanical tests, such as microcompression, microcantilever beam bending, micro tensile tests, and nanoindentation, the quality of the surface is critical. We demonstrate the effect of different surface preparation methods both on the microstructure and the mechanical properties. Mechanical polishing with two different end-polishing steps and combinations of mechanical polishing and ion-beam polishing are compared. Electron microscopy clearly showed the damaged or deformed surface layer of SMC specimens polished only mechanically, which significantly affected the mechanical properties as determined by nanoindentation. The microstructure of the particles was examined with electron backscatter diffraction and transmission electron microscopy revealing a subgrain structure within the particles. While the boundaries do not exhibit any cracks after indentation, the hardness of the boundaries and the adjacent material is clearly enhanced.