By Lou Sokolovskiy
Imagine this scenario: an independent sponsor has identified a promising acquisition with great growth potential. Negotiations are progressing, financing is being pulled together, but as the closing date looms, a challenge emerges: the target company's cash flow isn't sufficient to support the full amount of capital needed for the deal.
A potential roadblock, right? Not necessarily.
Steven D. Spence from Libertas Funding, a financial technology (fintech) company specializing in providing revenue-based financing to small-and-medium-sized businesses, recently encountered that exact situation.
The crucial difference? The independent sponsor was transparent about their broader structure and revealed they had a portfolio of other companies, including one with "significant cash flow more than enough to cover our financing," Steven said.
Because of that, Libertas Funding agreed to "finance against that portfolio entity," providing capital that the sponsor could then "apply it to the acquisition" of the initial target.
Steven provided this real-world example to underscore a vital lesson: transparency isn't just good practice—it can unlock solutions and get deals done. And the earlier you’re upfront about everything, the better.
“The sooner we're fully aware of that, the sooner we can avoid any surprises that may occur,” said Steven. “That could be problematic going into a close. We may, in most cases, have to come in and negotiate a subordination agreement with his more senior lender.”
In other words, find the roadblocks before they block the road and avoid such an undesirable situation.
Steven’s call for increased transparency from independent sponsors coincides with recent reports suggesting that private equity professionals have been facing increased scrutiny from lenders this year and imposed tighter financing conditions.
In its 2025 Global Private Markets Report, McKinsey & Company said that refinancing “portfolio companies in an uncertain, higher-rate, and more discerning lending environment will also be challenging.”
What Independent Sponsors Should Share Upfront
But Steven says independent sponsors significantly increase their chances of getting funds if they are open and upfront in the following three areas:
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The Capital Structure of the Financing: Independent sponsors need to clearly outline how the deal will be funded. That includes equity, debt, and any alternative financing sources. Being upfront about financing structure allows stakeholders (lenders, sellers, and partners) to align their expectations and this will, in turn, minimize delays as there won’t be any surprises.
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The Structure of the Independent Sponsor: How is the independent sponsor structured? Do they have a broader portfolio? As the anecdote illustrated, understanding how the holding company is sponsored is important because if the target company has insufficient cash flow, alternatives might exist within the sponsor's overall structure.
- The Type of Financing Shared with the Seller: This point might not be the first thing that comes to mind, but Spence stressed its importance. When using cash flow-based financing, it will inevitably "impact the cash flow post-closing of his company, the founder's company."
In brief, independent sponsors trying to close a deal—particularly when bringing in financing partners later in the game—must prioritize transparency about the deal's capital structure, their own corporate and portfolio structure, and the nature of the financing being provided to the seller. This can proactively address potential hurdles, build trust, and ultimately help ensure a smoother path to closing.
What do you think of Steven’s take on transparency? Feel free to share your comments below and subscribe to our newsletter if you want more words of wisdom from America’s top business gurus and private equity veterans.
If you have any questions for Steven, or would like to learn more about Libertas Funding please contact Steven at steve.spence@libertasfunding.com.
Leverage Libertas Expertise to Navigate Complex, Time-Sensitive Opportunities
Libertas Funding, specializes in uncovering elegant, tailored solutions for complex and urgent financing needs. By partnering with Steven D. Spence and their team of experts, you gain a trusted ally capable of turning intricate deal structures into seamless closing processes.
Let Libertas apply their proven strategies to help you unlock the best outcomes—reach out today and discover why Libertas is the optimal partner for your next opportunity.
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May 2025
