M&A Monday – A Short Guide to Debt-Financing Options for an Independent Sponsor Buyer
July 22, 2025
by a professional from Georgetown University in Maryland, USA
Debt financing an Indy Sponsor deal is challenging. This post will cover the options for debt financing on an Indy Sponsor deal - each is combined, mixed, and matched to get a deal done.
1. Capital Consultants/Finders. If you are new to the Indy Sponsor world, a capital consultant is a great resource. They are not cheap (~2%-4% of capital raised), however, they will help hone a financing pitch, engage with banks so you can focus on the acquisition, and increase your likelihood of closing your deal. If you need recommendations on some good finders, I can send them your way.
2. Senior Conventional Bank. Conventional debt is debt from a bank (i.e., BoA). This will be the lowest interest rate debt with the best terms, but also the lowest leverage. Often a conventional bank will lend###-###-#### turns of EBITDA, which is typically only 40%-60% of the purchase price. If the Seller has a preexisting relationship with that bank, or if the business has significant hard assets to secure, that can help. These banks also move slowly and often need at least 60 days to close. Lender fees at closing are lower on bank debt and the lender legal fees (which is paid by the borrower) are lower. This debt has less flexible payment terms than other debt options, below.
3. Mezzanine. Mezz debt is often paired with Conventional debt and gives the Indy Sponsor another 1-2x EBITDA. This debt sits below senior debt in the capital stack and is subordinate. It often carries more flexible payment terms (i.e. interest only periods or PIKs). Sometimes, this mezz debt also comes with Warrants. A warrant is a contractual right to buy equity at a future date. This gives the Mezz lender a certain amount of equity at a future date, usually prior to a sale.
4. SBIC Fund. This is the most popular option for Indy Sponsors. These are often private debt funds, but banks often have SBIC funds. SBICs are much more flexible in their terms, can lend higher leverage (3-4.5x EBITDA), but at a significantly higher interest rate. These groups almost always have warrants with the debt and often invest equity for preferred equity in the borrower. They also request minority protections for major decisions (i.e., buying, selling, issuing new equity). While payment terms are flexible (often including IO periods), control rights, default terms, and other non-economic terms are tighter. SBIC debt often includes a ~2% loan fee at closing, pre-payment penalties, and minimum return thresholds upon a sale.
a. Unitranche Financing. SBIC Debt funds can often do unitranche financing. This is when they provide the full amount of the proceeds needed for the acquisition through a mix of debt, preferred equity, warrants, and mezz debt. The lender will usually want the sponsor to have a token amount of equity in the deal, but often rolling in an acquisition fee will be sufficient. This often results in the sponsor owning a vast majority of the equity (~70%+).
5. Seller Financing. Many Indy Sponsors overlook the promissory note in favor of Rollover or earnout, however, this can be an incredible tool to get the deal done.
6. Working Capital Lines. While less conventional, I have closed deals where the seller draws on their line of credit prior to closing, distributes it out to the seller as part of the purchase price. This is similar to a senior loan and usually requires consent from the lender and an equity purchase structure.
7. Sale Lease-Back. While often overlooked, the SLB is a great financing tool (see Sale Leaseback - A Glitch in the Matrix).
8. ABL Financing. The equipment of the target business often provides a great source of financing.
Here is a sample structure combining senior debt:
5.5x EBITDA of $3m ($16.5m) + Transaction Costs ($1.5m)
Senior Debt – 3.5x EBITDA ($10.5m)
Mezz Debt/Promissory Note – 2x EBITDA ($6m)
Rollover Equity/Earnout/Sponsor Equity/F&F Equity - $1m
Sponsor Transaction fee rolled in - $400k (2% - 2.5%)
Here is a sample unitranche structure using the same hypothetical:
Debt - 4x EBITDA
Preferred Equity – 1.5x EBITDA
Sponsor Rolled Fee – 2% of Purchase Price
Warrants to the lender - 10% of post-closing equity
Preferred Equity of 25% of post-closing equity
In a no-carry structure deal, the Indy Sponsor would own 65% of the economics and retains control.
1. Capital Consultants/Finders. If you are new to the Indy Sponsor world, a capital consultant is a great resource. They are not cheap (~2%-4% of capital raised), however, they will help hone a financing pitch, engage with banks so you can focus on the acquisition, and increase your likelihood of closing your deal. If you need recommendations on some good finders, I can send them your way.
2. Senior Conventional Bank. Conventional debt is debt from a bank (i.e., BoA). This will be the lowest interest rate debt with the best terms, but also the lowest leverage. Often a conventional bank will lend###-###-#### turns of EBITDA, which is typically only 40%-60% of the purchase price. If the Seller has a preexisting relationship with that bank, or if the business has significant hard assets to secure, that can help. These banks also move slowly and often need at least 60 days to close. Lender fees at closing are lower on bank debt and the lender legal fees (which is paid by the borrower) are lower. This debt has less flexible payment terms than other debt options, below.
3. Mezzanine. Mezz debt is often paired with Conventional debt and gives the Indy Sponsor another 1-2x EBITDA. This debt sits below senior debt in the capital stack and is subordinate. It often carries more flexible payment terms (i.e. interest only periods or PIKs). Sometimes, this mezz debt also comes with Warrants. A warrant is a contractual right to buy equity at a future date. This gives the Mezz lender a certain amount of equity at a future date, usually prior to a sale.
4. SBIC Fund. This is the most popular option for Indy Sponsors. These are often private debt funds, but banks often have SBIC funds. SBICs are much more flexible in their terms, can lend higher leverage (3-4.5x EBITDA), but at a significantly higher interest rate. These groups almost always have warrants with the debt and often invest equity for preferred equity in the borrower. They also request minority protections for major decisions (i.e., buying, selling, issuing new equity). While payment terms are flexible (often including IO periods), control rights, default terms, and other non-economic terms are tighter. SBIC debt often includes a ~2% loan fee at closing, pre-payment penalties, and minimum return thresholds upon a sale.
a. Unitranche Financing. SBIC Debt funds can often do unitranche financing. This is when they provide the full amount of the proceeds needed for the acquisition through a mix of debt, preferred equity, warrants, and mezz debt. The lender will usually want the sponsor to have a token amount of equity in the deal, but often rolling in an acquisition fee will be sufficient. This often results in the sponsor owning a vast majority of the equity (~70%+).
5. Seller Financing. Many Indy Sponsors overlook the promissory note in favor of Rollover or earnout, however, this can be an incredible tool to get the deal done.
6. Working Capital Lines. While less conventional, I have closed deals where the seller draws on their line of credit prior to closing, distributes it out to the seller as part of the purchase price. This is similar to a senior loan and usually requires consent from the lender and an equity purchase structure.
7. Sale Lease-Back. While often overlooked, the SLB is a great financing tool (see Sale Leaseback - A Glitch in the Matrix).
8. ABL Financing. The equipment of the target business often provides a great source of financing.
Here is a sample structure combining senior debt:
5.5x EBITDA of $3m ($16.5m) + Transaction Costs ($1.5m)
Senior Debt – 3.5x EBITDA ($10.5m)
Mezz Debt/Promissory Note – 2x EBITDA ($6m)
Rollover Equity/Earnout/Sponsor Equity/F&F Equity - $1m
Sponsor Transaction fee rolled in - $400k (2% - 2.5%)
Here is a sample unitranche structure using the same hypothetical:
Debt - 4x EBITDA
Preferred Equity – 1.5x EBITDA
Sponsor Rolled Fee – 2% of Purchase Price
Warrants to the lender - 10% of post-closing equity
Preferred Equity of 25% of post-closing equity
In a no-carry structure deal, the Indy Sponsor would own 65% of the economics and retains control.