Do I have to put money into my transaction?
This is one of the most common questions that Frisch Capital receives with first time clients. Historically, to purchase a company you needed to provide some portion of the equity, real dollars, not just “sweat equity”. However, the brilliance of the Independent Sponsor model is that you do not have to put money into your transaction. Let me clarify that, you are NOT required to put additional money into the transaction. Many do “roll” the closing fee they receive at closing but they don’t put any additional dollars in the deal. Frisch Capital has raised over $1 Billion for Independent Sponsors and a number of these clients did not put any additional money into the transaction. These clients still received a closing fee (which they often roll into the deal for equity), an annual management fee and some "promote" equity in the acquired company.
Does not putting money into the transaction hurt our ability to raise capital?
There is a lot of capital available today in the market. Literally trillions of dollars is sitting in committed capital in financial institutions and both debt and equity funds, not to mention family offices. These capital sources have to put that money to work. While not putting additional money into a transaction does reduce the number of capital sources willing to look at your transaction, there are still plenty of capital sources excited to look at and review your deal.
What is the benefit if I do put additional money into the transaction?
Some capital sources like to see the Independent Sponsors they work with have some real “skin in the game”. So what exactly does this mean for an Independent Sponsor?
“Skin in the game” refers to the capital source providers wanting to feel that if things do not work out for a transaction, the Independent Sponsor will feel a loss just like they would on their capital invested. I’m sure many of you are saying to yourself, “But we have time, sweat and due diligence money already invested in the transaction even before any capital providers got involved. We already have a lot of “skin in the game”. I agree with you on principle. However, from some capital sources perspective (though not all), if you are just rolling your fee, that is not additional capital and there needs to be more. While in many ways an Independent Sponsor writing a check (in addition to rolling his fee) is really just a symbolic gesture; it shows that you believe in the deal. In addition, you will also get to participate in purchasing equity pari passu with your capital partners.
So, if it’s symbolic, what amount is needed to make a symbolic gesture?
Capital providers that want an Independent Sponsor to write a check usually ask that it be a “meaningful amount”. They want to know that you believe in the deal as much as they do and that your interests are fully aligned. However, this is where it gets interesting. A meaningful amount is what you, the Independent sponsor, says it is.
There is not a specific amount or percentage of the equity that defines a meaningful amount. For some Independent Sponsors this could mean $100K for others $500K or even $1MM or more. While it does depend somewhat on the deal size, it is not the actual amount that is important, it is the fact that you believe in the transaction enough to write a check.
In summary, you do not have to put money into your transaction. However, if you do choose to put your own money into the transaction and write a check it increases the number of capital partners willing to look at your deal. You also get the ability to purchase equity alongside the capital provider, creating an even greater success for yourself.