4 sources of equity for lower-middle market deals:
(1) Rollover equity from seller. Usually 10-30%. Shows alignment, buy-in, continuity.
(2) Skin in the game from the independent sponsor. Rolling the closing fee is table stakes, usually some cash on top of that is required too. $50k to $1m, whatever is meaningful.
(3) SBICs and mezz lenders allocate ~15% of their funds towards equity, so most of their loans come with a small tranche of equity too. Super helpful to close the fundraising gap, great for alignment.
(4) The remainder must be raised from HNWIs, FOs, and other investors. The size of this equity piece correlates with the valuation. Your base case should showcase ~30% IRR to compel capital.
Good luck.
