Let’s talk about the independent sponsor dilemma
You are navigating the capital gap
With independent sponsor deals, there are limited funding options
You are too big for an SBA 7A loan
You may be too small for traditional lenders and institutional private credit or private banks
There is constant capital assembly
Each transaction requires a search for new investors while also trying to originate and close the deal
Sometimes you are outmatched by larger funds
This middle gap is very challenging
Business services and industrials led the targeted sectors
The majority of transactions were:
Average multiples were roughly:
Understanding what other deal makers are seeing is helpful
There are trends that shift from year to year
You want to build capital relationships before you need them
Independent sponsors typically source capital from:
These funds are relationship-based and selective
You need to establish yourself early in the process
You need to build confidence in the deal you bring to them
They will assess:
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Lenders and investors are very stringent before committing capital
They are going to look for:
Without a third-party report, they will not entertain conversations
You need a full deal team:
Without independent analysis, you likely will not be able to raise funds
SBA 7A loans focus on tax returns
Independent sponsor deals focus on:
They rely on these systems for defendable IBIDA
Without a defendable quality of earnings, your deal will not close
This is not optional
It is the foundation of your capital stack
Lenders will not underwrite without adjusted IBIDA analysis
Deals with a quality of earnings closed at:
You want to ensure your CPA firm is covering:
As businesses grow, they must be in line with GAAP
They must be presented on an accrual basis
Financial diligence is the foundation for raising capital
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You need to confirm where you are going to source funds
When you step into senior credit, there are covenants attached to your loan
If a covenant is triggered, that is bad news for your loan
You need to understand the difference between SBA loans and private credit covenants
Does your carry actually work
After everyone else gets paid, is there anything left for you
Revenue fills the bucket
Money goes to:
What is left is your carry
If IBIDA misses by 10 to 15 percent, your carry may be zero
You need to stress test IBIDA
You want to perform a proof of cash
Match reported revenue and expenses to bank inflows and outflows
Conduct a working capital analysis and set the working capital peg
Assess recurring versus non-recurring revenues
Some critical mistakes include:
Starting too late can lead to:
Losing the lender late in the process forces you to go back to the seller
Extend the window
Risk losing your LOI
Financial diligence is the foundation for raising capital
You need to start early
Build relationships
Validate earnings
Manage the capital stack
And protect your deal from LOI to closing
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