Independent Sponsors - Stop Leaving Money on the Table

Strategy #1: Performance-Based Tiered Carry

This is probably the most common way to push past the 20% baseline, and for good reason. It aligns everyone's incentives while rewarding you for exceptional performance.

How it works:

• You start at the standard 20% carry

• As investment returns increase, your percentage escalates

• Investors keep their downside protection, you get upside leverage

Example structure:

• 20% carry up to 2.5x MOIC

• 30% carry from 2.5x to 3.0x MOIC

• 40% carry above 3.0x MOIC

I've seen deals where sponsors negotiated 60%+ carry once investors cleared certain return hurdles. That's not typical, but it shows what's possible when you've delivered home runs before.

Why investors accept this:

Their downside is protected. They're still getting their preferred returns and target multiples before the carry escalates. The higher percentages only kick in when they're already winning.

Implementation tips:

• Set realistic hurdles that you genuinely believe you can achieve

• Use industry-standard multiples (2.5x, 3.0x) rather than unusual thresholds

• Make sure the IRR hurdles align with MOIC hurdles (don't create weird scenarios)

What to avoid:

• Making hurdles too easy (investors will see through it and reject the structure)

• Making hurdles too hard (defeats the entire purpose if you'll never hit them)

Strategy #2: Thinly Equitized Deal Structures

Here's something most sponsors don't think about: the less equity you need, the more leverage you have in negotiations.

Instead of the typical capital stack where 50% is equity, what if you could get that down to 20-25%?

How to achieve this:

• Maximize senior debt (push your lenders on advance rates)

• Negotiate meaningful seller notes (10-20% of purchase price)

• Use earnouts to bridge valuation gaps

• Consider alternative lenders like private credit and SBICs

• Get creative with deferred consideration structures

Why this gives you negotiating power:

Simple math. If you need to raise $10M in equity instead of $20M, you have options. There are way more equity providers who can write $10M checks than $20M checks. More competition for your deal means better terms.

Plus, when investors are putting in less capital, they're often more flexible on governance. Fewer board seats, faster decisions, less operational oversight.

The economics work in your favor:

Let's say you're buying a $40M business:

Traditional structure:

• $20M senior debt (50%)

• $20M equity (50%)

• You need to find large equity checks

Thin equity structure:

• $24M senior debt (60%)

• $6M seller note (15%)

• $10M equity (25%)

• You have way more equity provider options

Risk management:

This only works if the business can support the debt load. Make sure you have:

• Predictable, recurring revenue

• Strong cash flow generation

• Limited capital expenditure requirements

• Buffer for economic downturns

When you can safely run thin equity structures, you're playing a different game than sponsors who need 50% equity checks.

Strategy #3: Co-Invest Your Own Capital

This is the most powerful lever on the list, and it's not even close.

Writing a real check changes everything.

What we're talking about:

Investing 5-10% of the total equity requirement from your own pocket. Not your fees. Not rolled compensation. Actual cash you're putting at risk.

Why this transforms negotiations:

When you have genuine skin in the game, capital providers view you completely differently:

• It signals conviction (you're betting your own money on this outcome)

• It aligns interests (you feel the downside just like they do)

• It changes the conversation (you're a partner, not just a promoter)

What you get in return:

• Better carry percentages

• Looser governance terms

• More operational freedom

• Faster decision-making (fewer approval requirements)

• You're building real wealth, not just earning fees

How to structure it:

You can invest pari passu with other equity (same terms), or some sponsors negotiate a separate preferred class with better economics.

Creative approaches:

Some operators use personal guarantees on debt as "equity equivalent" to show commitment. Not quite the same as cash in, but capital providers do value it.

The psychological shift:

When it's your money on the line, investors trust your decision-making in a different way. They know you're not going to take unnecessary risks or pursue vanity projects.

If you can't swing 5-10% of the equity check yourself, consider bringing in a small group of personal investors (friends, family, former colleagues) to help you reach that threshold.

Strategy #4: Roll Closing Fees Into Equity

Most sponsors take their transaction fee in cash. Standard practice is 1-5% of enterprise value, paid at closing.

But what if you converted that fee into equity ownership instead?

The math:

On a $20M enterprise value deal:

• 2% closing fee = $400,000

• That $400K becomes equity instead of cash

• You now own a meaningful piece of the ongoing business

Real retention numbers:

I've seen sponsors retain 40-75% of the common equity on day one using this approach. That's not a promote structure. That's actual ownership.

Why this works:

• Transforms a one-time fee into long-term ownership

• Shows investors you're focused on value creation, not just closing deals

• Creates alignment (you have permanent equity, not just a profit participation)

• Compounds over time as the business grows

How investors view this:

They love it. You're saying "I believe in this business so much that I'm willing to convert my earned fee into at-risk equity." That's a powerful signal.

When it makes the most sense:

This strategy is best when you believe in significant value creation potential. If you're buying a business where you can legitimately double or triple EBITDA, your rolled closing fee could be worth 5-10x what you would have taken in cash.

Tax considerations:

Talk to your accountant. The tax treatment of rolled fees can be complex depending on how the structure is set up. But done correctly, this can be very tax-efficient.

Strategy #5: Leverage Domain Expertise

Here's something capital providers will never tell you directly: they'll pay more for operators than they will for financial sponsors.

If you spent 15 years running companies in your target industry, that expertise is worth something at the negotiating table.

What counts as real expertise:

• 10+ years operating in your target sector

• P&L responsibility (not just functional experience)

• Demonstrated track record of growing businesses

• Deep relationships in the industry

• Understanding of operational levers that drive value

How to position this in negotiations:

Don't just say you have expertise. Show specific examples:

• "At my last company, I grew EBITDA from $3M to $12M over four years by implementing X, Y, Z operational improvements"

• "I've hired and trained 50+ salespeople in this industry and know exactly what great looks like"

• "I have relationships with the top 3 distributors who control 60% of market access"

Why capital providers care:

They're not just betting on the business. They're betting on you to make the business better. If you can de-risk the execution, they'll give you better economics.

Beyond just carry:

Domain expertise also unlocks better deal flow. Sellers in your industry know who you are. You see opportunities before they hit the market. You can move faster and with more certainty.

The multiplier effect:

When you combine domain expertise with the other strategies on this list, everything becomes more credible. Capital providers think: "This person knows the industry, they're co-investing, and they're rolling their fees. This is a serious operator."

Strategy #6: Run a Competitive Financing Process

This is the most overlooked strategy on the list. Most sponsors take the first decent term sheet that shows up.

That's leaving money on the table.

Why competition matters:

Capital providers leave room in their initial offers. Always. They expect negotiation. If you don't create competitive tension, you'll never see their best terms.

How to do this right:

On the debt side:

• Get 50+ lenders competing simultaneously

• Mix of senior lenders, unitranche providers, SBICs, and alternative lenders

• Give everyone the same information package and deadline

On the equity side:

• Create tension between 50+ serious equity investors

• Look at Search Fund equity providers, ETA providers, PE firms and Family Offices

• Focus on groups that actually fit your deal profile

Timeline management:

Set a clear deadline for best and final offers. Stick to it. This creates urgency and prevents endless back-and-forth.

Information control:

Never show Provider A what Provider B offered. But absolutely let them know there's competitive interest. "We're speaking with several groups and will be making a decision by [date]."

What you're optimizing:

It's not just about carry percentage. Look at the total economics:

• Carry percentage and hurdles

• Management fees

• Transaction fees

• Governance terms

• Approval rights

• Debt terms (leverage, covenants, pricing)

The compounding effect:

Better debt terms mean you need less equity. Less equity needed means more negotiating leverage with equity providers. It all compounds.

Real results:

I've seen competitive processes improve carry by 30 percentage points while also getting better overall structure. That's not marginal. That's transformational to your economics over a 5-year hold.

Need help with this?

This is where CapFlow comes in. We run competitive financing processes for sponsors every day. We know which lenders are aggressive on leverage, who is actively lending in your sector, and how to create the right amount of tension to maximize your terms.

If you're working on a deal and want to make sure you're getting the best possible terms, reach out to us. We'd love to discuss how we can help structure and negotiate your next transaction.

Conclusion: Better Terms Come From Better Positioning

The 20% carry baseline is fine for first-time sponsors. But if you're bringing real value to the table, you should capture more of the upside you're creating.

These six strategies aren't mutually exclusive. The best sponsors combine multiple approaches:

• They co-invest their own capital

• They roll their closing fees into equity

• They negotiate tiered carry based on performance

• They run competitive processes on both debt and equity

Start with 2-3 strategies that fit your situation and track record. You don't need to use all six on every deal.

Action steps:

1. Document your track record (specific examples of value you've created)

2. Evaluate your next deal (which strategies could apply?)

3. Consider co-investing (even a modest amount changes the dynamic)

4. Always run a competitive process (you'll never get best terms without it)

The sponsors getting the best economics aren't necessarily doing the best deals. They're just better negotiators who understand these levers and know when to pull them.

Now you do too.

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