An investor's perspective on expected Searcher / Independent Sponsors capital contribution

At Main Street Capital Network (a syndicate of 150+ SMB investors—individuals, family offices, and funds), we periodically send a newsletter to acquisition entrepreneurs we've connected with. This week's article discussed investor expectations regarding the personal capital contribution by searchers and sponsors. I'm sharing it below with the Searchfunder community in case others find it helpful.

If you're a searcher or independent sponsor who expects to raise equity in the future, don't hesitate to contact us here if you believe your deal will fit our investment criteria. We like to connect with acquisition entrepreneurs at all stages (currently searching, preparing an LOI, or an accepted LOI).

If you're an accredited investor interested in investing in search and independent sponsor deals with us, please complete this investor form.

----------------------------

How Much Personal Capital Investors Expect You to Contribute

It's no surprise that investors place great significance on how much skin in the game you have. For self-funded searchers, the SBA personal guarantee is table stakes.

Your expected capital contribution to a deal, though, is not a set dollar amount or a percentage of the transaction. I've seen a searcher invest as little as $25,000 in a deal and an independent sponsor invest as much as $1M.

The right amount is more of a concept than a number. What is an amount that demonstrates your confidence in the deal but won't leave you sleepless at night when the business hits a minor setback?

This will primarily be a function of your personal financial situation. As investors get to know you, based on your professional background and personal situation, they will form a view (right or wrong) of your financial resources and, hence, how much they feel is the "right" amount.

Investors don't expect someone with a military background just out of business school to have the same ability to contribute to a deal as someone who has spent the past decade in private equity.

That being said, investors can sometimes have the wrong impression of your financial resources. You will rarely be directly told that you're not contributing enough capital to a deal, so you'll have to pick up on more subtle clues (e.g., an investor's facial expression after hearing your response to the question).

Are you getting the impression that investors have an unrealistic view of your financial resources? During one-on-one conversations, you may want to get a little personal and mention relevant items like student debt or personal capital tied up in illiquid employer stock. I wouldn't lead with this or spend too much time on it, but it may be in your best interest to provide this level of transparency to an investor who seems skeptical of the amount of skin in the game you have.

On the flip side, I recommend that searchers and sponsors highlight their investment amount in the deal when it is unusually large. In fact, I might disclose it as early as in your teaser. This is a big selling point.

I want to be clear that I'm not recommending how much personal capital you should put into a deal. That is a personal decision that only you can make. Rather, this is an attempt to give you a perspective on how investors might perceive your capital contribution.

----------------------------

You can learn more about Main Street Capital Network here.