How to Raise Equity for an Acquisition

Debt is easy (relatively speaking). It always will be. The debt portion of the overall capital structure is what most traditional bank financiers chase all day long. Equity, on the other hand, is much more difficult. Most people understand these principles when it comes to mortgage financing, but — for some reason — these principles are often woefully ignored when it comes to acquisition finance.

Here are a few examples from recent vintage in our discussions with would-be clients looking to fund an acquisition:

• “I have this great $5M EBITDA business. I have negotiated a 3x EBITDA valuation with 60% down and 40% over three years. I just need the debt to fund the deal.”
• “I have been turned down by the SBA. I can bring no equity, but I have this friend who is selling his business and I want to buy. The company is valued at $15M.”

The list could go on and on. The so-called independent sponsors of the world will always have more difficulty in raising equity over debt. Investors (especially debt investors) like to see some form of equity skin in the game. Theirs is a world of capital preservation, not capital appreciation. If they wanted appreciation, they would come in as equity holders. Debt lenders will take a first look at the assets of the business as a collateralization mechanism for the debt.

Next, they will take a look at the personal assets of whoever owns the equity — typically using things like Personal Guarantees on the loan. What about for those looking to raise the equity needed to put a sufficient “skin” into a merger or an acquisition? Here are some high-level thoughts for getting funded in this manner.

First, independent sponsors can take on many forms. Some are completely fundless, others come with some funds but may need more to round out a management buyout. Depending on the amount they bring to the table, the “rounding-out” can be done in an easier manner. Second, capital is not created equal. There is a big difference between accredited, individual investors and institutional investors — not just by definition.

The way both groups treat investments can vary widely. There are some online investing platforms that are looking to change the way independent sponsors source their capital; the reality is that most individual accredited investors are likely not the best route for sourcing acquisition equity capital. In contrast, more and more private equity funds are looking to management buyout and savvy independent sponsors to bring them off-market deals. In a world where investment bankers auction off deals to the highest bidder, independent sponsors can be a bright light in the dark room for sourcing quality, off-market deals.

We are seeing more of these types of deals and engaging with some. However, the big question mark as it relates to getting funded is the sponsors themselves. When you reach out to an investment banker or finder and say things like, “I can get up to $200,000,000 in committed debt, what can you do to bring me the equity?” you are likely to receive major push-back.

The process to raise the equity for larger transactions is going to be a slog as it can take a very long time. In addition, both investment bankers and private equity fund managers are going to see through a comment like that. They will see the sponsor for what they are: someone not sophisticated enough to know how deal financing actually works. At the end of the day, independent sponsors require an awkward mix of humility and sophistication.

Understanding the Capital Stack in an Acquisition

To raise equity effectively, you first need a firm command of how an acquisition capital structure is assembled. A typical leveraged buyout or management buyout involves several layers:

• Senior secured debt — the largest tranche, provided by banks or direct lenders, collateralized by business assets and cash flow.
• Mezzanine or subordinated debt — a middle layer that carries higher interest and sometimes includes equity warrants; it bridges the gap between senior debt and pure equity.
• Equity — the most junior, highest-risk layer, which absorbs losses first but captures the greatest upside if the business performs.

Equity typically represents somewhere between 20% and 40% of the total purchase price in a well-structured leveraged transaction, though that proportion shifts depending on asset quality, cash flow stability, and current lending market conditions. Sponsors who arrive with a clear picture of how much equity capital is required — and a credible plan for sourcing it — earn immediate credibility with lenders and co-investors. For more on the debt side of the equation, debt financing resources outline the key lender expectations and structuring considerations.

Where Independent Sponsors Source Equity

The equity sourcing challenge is real, but there are several well-trodden paths that experienced independent sponsors use:

• Family offices — many single-family and multi-family offices actively seek co-investment opportunities in lower-middle-market deals. They are often more flexible on structure and timeline than institutional funds.
• High-net-worth individual networks — accredited investors who have made their wealth through entrepreneurship or corporate careers sometimes co-invest in businesses they understand operationally.
• Private equity funds seeking proprietary deal flow — as noted above, some PE funds prefer to partner with independent sponsors on off-market deals rather than compete in broadly marketed auction processes.
• Seller rollover equity — persuading the selling owner to retain a minority stake in the business post-close can reduce the amount of new equity required and aligns seller incentives with buyer success.

Each of these channels requires a compelling investment thesis, a clear picture of acquisition financing structure, and a sponsor track record that instills confidence. For sponsors still building their track record, smaller initial transactions that demonstrate execution ability open doors to larger institutional capital in subsequent deals. The article on why you should talk to a trusted business finance partner before jumping into an acquisition offers relevant framing on building the right advisory relationships early.

Presenting to Equity Investors

When approaching institutional or sophisticated individual equity investors, the quality of your investor materials matters significantly. A credible equity raise package typically includes:

• An executive summary or teaser that articulates the investment thesis concisely.
• A detailed financial model with clearly labeled assumptions, historical performance, and projected returns under multiple scenarios.
• A management presentation that demonstrates the sponsor’s understanding of the business and its industry dynamics.
• A term sheet or deal structure outline that shows the proposed capital stack and how returns will be distributed.

Investors evaluate both the deal and the dealmaker. Arriving prepared, demonstrating intellectual honesty about risks, and showing that you have anticipated the questions investors will ask separates credible sponsors from those who will struggle to close.

Frequently Asked Questions

How much equity do I typically need to close an acquisition?

The required equity contribution varies by deal size, business quality, and the lending environment, but in many lower-middle-market transactions, equity represents somewhere between 20% and 40% of total enterprise value. Lenders and co-investors will generally want to see a meaningful equity cushion before committing their capital.

Can I use seller financing as part of my equity contribution?

Seller notes are treated as subordinated debt, not equity, by most institutional lenders. They count toward closing the financing gap, but they typically do not satisfy a lender’s requirement for true equity “skin in the game” from the buyer. Some lenders will accept seller notes below a certain threshold as quasi-equity on a case-by-case basis.

What makes an independent sponsor attractive to a private equity fund as a co-investor?

PE funds look for sponsors who bring genuinely proprietary deal flow (i.e., deals not broadly marketed or auctioned), deep operational expertise in the target industry, a credible management plan post-close, and realistic return expectations. Sponsors who can demonstrate one or more of these attributes are far more likely to find institutional equity partners than those whose primary pitch is that they have secured debt commitments.