Author: Matthew Meyer, Senior Director, Sponsor Finance
By some counts, 70% of lower middle market firms will be looking for new owners within the next decade. Whether ownership of a business transitions to family members, employees or a third party, financing is a crucial aspect of any transaction. Banks, like FNBO, can support financial buyers (sponsors) in raising the capital needed to ensure a successful transition of ownership, but is that right for every situation?
Understanding Sponsor Finance
Sponsor finance typically involves banks partnering with financial sponsors (primarily private equity firms) to provide a portion of the capital used to acquire majority ownership of private businesses.
Through its partnership with private equity firms, FNBO helps facilitate the transition of a business via senior secured financing. These private entities provide capital specifically for each individual business transition, focusing on the needs and goals of that company. In some instances, FNBO may also provide financing to other investor types, such as family offices that wish to invest funds in viable and growing operations.
Our team understands that maintaining business values and culture can be an important consideration for sellers when it comes to a company’s transition. This is one reason we seek to work with sponsors that have a track record of partnering with existing management teams that expect to remain onboard after closing. Sponsors that understand the nuance of lower middle market businesses typically exhibit a higher degree of regard for maintaining culture, brand integrity and community standing, since commercial success is largely tied to building a strong economic base within the community, state or region.
Our goal is to partner with exceptional sponsors to support the sale of a business, so we seek quality partners whose own interests align with those of the business and its employees.
Underwriting Criteria
FNBO typically works with lower middle market firms on leveraged buyouts of family- and founder-owned businesses. Below are a few items that typically represent the deals we partner on:
- The business operates within the following industries: manufacturing, distribution, food and beverage, business or industrial services.
- Products (or services), customers and suppliers are diversified.
- An established and experienced management team plans to remain in place through the ownership transition.
- The transaction is well-capitalized, allowing for adequate flexibility in operating performance post-closing.
Through our sponsor finance efforts, we make it possible for our existing commercial customers to continue partnering with FNBO through a change in control, leveraging the trust and familiarity in that relationship to assure value alignment and transition success. Keeping the bank involved throughout the sale process also allows the business to maintain its banking relationships and avoid disruption for the company’s customers, vendors and employees.
Our team benefits from an operating structure that is relatively flat, allowing us to move quickly and manage everything from origination through underwriting, closing and servicing. This provides continuity in the working relationship between buyers, management teams and the bank. This approach also affords us the ability to move at a pace that ensures timeliness of closing.
Sponsor finance can be a valuable solution for lower middle market businesses undergoing ownership transitions. Partnering with a bank like FNBO, which aligns with strong partners that tailor to the unique needs of each business, can streamline the transition process, allowing management teams to remain focused on operating the business.
About the Author
Matt oversees FNBO’s Sponsor Finance team. He partners with businesses and financial sponsors on general corporate credit and M&A financing. Matt first joined FNBO and the Corporate Banking team in 2013 and has managed credit relationships across a multitude of industries over that time including private equity, healthcare, manufacturing and financial services. He holds a bachelor’s degree in economics from the University of Nebraska at Omaha and earned an MBA from Nebraska Wesleyan University.
