Three Characteristics of Great Independent Sponsoring Financial Partners

Selecting the right equity partner is critical for independent sponsors. Unfortunately, we often hear sponsor horror stories about equity partners re-negotiating deals, pulling out at the last minute, or becoming less than ideal partners after a deal closes.

We often find our clients asking us: What sources of capital are the best partners for unfunded sponsors? What should non-funded sponsors look for in an equity partner? What type of financing source would be the most suitable for me and my businesses?

Here are 3 traits shared by great independent sponsor funders:

1. They offer a fair economics of independent sponsors

The proposed independent sponsor economics (transaction/promotion fee, accrued interest, or ongoing ownership/management fee) are designed to reward the sponsor for the value delivered and to incentivize the sponsor to grow the business being acquired.

If you bring an ownership deal, at an attractive valuation, with a strong management team and a growth plan, you should be rewarded with superior unfunded sponsor economics. Why is anything less than that reasonable or acceptable?

Be careful not to fall into the trap of accepting a below-market economy if you can help it. Many of the better-known and long-standing providers of unfunded sponsor capital often take advantage of their unfunded counterparties, particularly new sponsors or those that are not executing a strict capital raising process.

Any rejection of a capital source such as “Well, that’s an overblown deal for us” or “That’s not what we do” means it’s probably not a good fit for you or your deal.

2. They adopt the independent sponsor model

The ideal funding source encompasses independent sponsor model because they want to, not because they have to.

Let’s face it, not every SBIC, family office, or private equity fund really wants to invest with non-funded backers, but as the market for independent backers has grown, it’s become harder for private equity firms to ignore them as a viable source of business flow.

You need to ask the right questions: how many independent sponsor deals have they done? What economy have provided sponsors in the past? What are your criteria for unfunded sponsorship deals? How do they see their role after the transaction is closed? Based on their answers, you can decide if they really want to work with you…

3. They provide more than just debt or equity

A great funding partner brings more to the table than the capital to close your deal.

The best sources of financing are strategic: they will enable growth by financing complementary acquisitions; they have helpful connections in the industry; They are knowledgeable about best practices for growing a business.