4 Ways to Measure Background Fit for the Independent Sponsor

Deals tend to be chased at maximum speed often with minimal time for aspiring independent sponsors to discover the most important thing – can my deal be financed? Buyers usually assume any deal can be financed, including ones with rickety deal structures. All too commonly, independent sponsors advance through the financing process, only to find out there is no lender appetite for their deal. This is a colossal waste of time and resources. The reasons for lack of finance-ability usually boil down to the quality of the company, lack of background fit or an imbalanced price and deal structure. Each of these factors has a multitude of sub-reasons which affect a lenders overall view. It’s an inexact science with many shades of grey. Its completely understandable that buyers may not think of all of this when putting the deal together, as overfocusing on these things can make a sponsor gun shy. One of the most prevalent issues is lack of background fit, where the independent sponsor does not bring enough experience to the table. Lenders need a return of their capital to stay in business, which means they want to work with people that have deep industry experience and know what they are doing. Some independent sponsors confuse prior exposure to an industry with direct experience in an industry. Seeing a deal through a more transactional lens, they see their experience as transportable whereas a lender may not. Here are the Attract Capital 4 ways to measure your background fit:

1. Do you have prior operational experience running a company? – it’s surprising how many independent sponsors answer no to this question. Most new independent sponsors are relatively young and have worked previously at large banks or consulting firms. Running a company is very different than investment banking or consulting work.
2. Do you have prior successes in the space? – acquirers with prior successes running and growing similar companies through large growth runs have instant credibility with lenders. This is the single most important attribute for any aspiring independent sponsor. If you lack prior success in the space, perhaps think about adding someone to your team that does.
3. Do you have years of direct experience in the space? – acquirers who have spent years running complex organizations similar to the target company will get lender respect. This usually results in the executive having higher level insights on organizational, customer and strategic matters which help build lender comfort.
4. Could you get by if a senior manager left the company? – often middle market companies lack C-level management depth which increases the dependency on a small core group.  You need to be sure that if someone important leaves, you have the requisite skills to fill in or at least find someone quickly that will.