Selecting the right capital partner is critical for independent sponsors. Unfortunately, we often hear horror stories from backers about equity partners renegotiating deals, pulling out at the last minute, or becoming less than ideal partners after a transaction closes.

We often find our clients asking us: What sources of capital are the best partners for unfunded backers? What should backers without funds look for in an equity partner? What type of funding source would be best suited for me and my deals?

Here are 3 traits shared by large independent sponsor funders:

1. They offer a fair economy from independent sponsors

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

If you bring in an ownership deal, at an attractive valuation, with a strong management team and growth plan, you should be rewarded with superior unfunded backer 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 avoid it. Many of the more well-known and long-standing providers of non-funded sponsor capital often take advantage of their non-funded counterparties, particularly new sponsors or those that are not executing a strict process of raising capital.

Any rejection from a source of capital such as “Well, that’s an overkill 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 embrace the independent sponsor model

The ideal funder adopts the independent sponsor model because they want to, not because they have to.

Let’s face it, not all SBICs, family offices, or private equity funds really want to invest with backers without funds, 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 sponsors provided in the past? What are your criteria for unfunded endorsement deals? How do they view their role after the transaction closes? 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 financing 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; have useful industry connections; They have insights into best practices for growing a business.