Lenders underwrite the ownership table as closely as the business. They want to know who controls the company, who runs it, whose money is equity and whose is a loan, and who, if anyone, guarantees. Investor money that is true equity strengthens the deal; money investors lend, or preferred equity that must be redeemed on a date, is treated as debt or close to it, and must sit behind the senior loan. Lenders also want one clear operator with relevant experience. Set the table, the investors' terms and the governance with the lender in mind before investors are promised anything.
- Guarantees
- Negotiated: often none in sponsor-style deals; operating and larger owners in owner-led bank deals
- Investor equity
- Counts as equity when it cannot be taken out ahead of the loan
- Investor loans
- Debt, subordinated to the senior loan; counted in total leverage
- Preferred equity
- Equity only if redemption and dividends wait for the senior loan
- What lenders want to see
- One operator with relevant experience, clear control and a buy-sell agreement
The ownership table is part of the credit
When one buyer acquires a company, the lender asks whether that buyer can run it and whether the company can carry the debt. When a group buys, there are more questions. Who owns what at closing? Who runs the company day to day, and who is only writing a check? Whose money is equity and whose is a loan? Who controls the board? And what happens if a partner dies, wants out, or falls out with the others?
The common shapes are two or three operating partners splitting the work; one operator backed by family offices or individual investors who stay out of the business; and an independent sponsor backed by a capital partner, where the operator's stake is partly earned rather than paid for. The lender's questions are the same in each; the answers differ.
Who has to guarantee
In conventional lower-middle-market lending there is no single rule. Guarantees are negotiated, and the answer depends on the lender, the leverage and who the owners are.
| Situation | What lenders commonly ask | What to watch |
|---|---|---|
| Institutional capital partner with an operator | Often no personal guarantees; the lender relies on the equity, covenants and collateral | Pricing and covenants reflect the absence of a guarantee |
| Owner-operators buying with a bank | Guarantees from the operating owners and the larger owners | Joint and several guarantees make each guarantor liable for the whole loan, not a share |
| Operator plus passive individual investors | Operator guarantees; passive investors sometimes on a limited or several basis, or not at all | A limited guarantee has to be negotiated and written as one |
| A spouse or family member holding shares | Treated like any other owner of that size | Ownership for estate planning can bring guarantee requests with it |
Two points matter more than the pattern. First, most guarantees are joint and several unless negotiated otherwise: each guarantor can be pursued for the entire unpaid balance. Second, drawing stakes to avoid a guarantee is visible to lenders and draws the scrutiny it is meant to avoid. If an investor will not guarantee, the honest answers are a lender that does not require one, at its price, or a limited guarantee agreed up front. The general picture is on personal guarantees on business loans.
Investor equity, investor loans and preferred terms
Investors can put money in several ways, and the lender treats each differently. The label on the document matters less than whether the company has to pay it back, and when.
| How the investor puts money in | How lenders treat it | What the lender needs |
|---|---|---|
| Common equity in the buying company | Equity | The source of funds, and a capitalization table as it will stand at closing |
| Preferred equity with no mandatory redemption before the loan matures | Equity, ranking ahead of the common owners but behind the lenders | Dividends that accrue rather than pay in cash, or are paid only within the loan's restricted payments basket |
| Preferred equity with a fixed redemption date or put right | Debt-like: a claim on cash ahead of the owners | Redemption pushed beyond the loan's maturity, or subordinated to it |
| A shareholder loan to the company | Debt, subordinated to the senior loan and counted in total leverage | A subordination agreement; interest usually accrued rather than paid |
| A loan to an individual partner to fund their stake | Outside the company, but a lender will ask how it is repaid | Comfort that repayment does not depend on distributions the loan restricts |
Investors are often promised a preferred return or regular distributions. Those payments come after debt service, and the credit agreement limits them through a restricted payments covenant. Promising investors a fixed yearly payment before seeing what the lender will allow is how groups end up renegotiating with their own investors after the term sheet arrives. Preferred equity vs mezzanine and shareholder loans and lenders cover the detail.
Equity from investors does more than fill a gap. Every unit of genuine equity reduces the debt, and a lender reading a deal where the operator and the investors both have real money at risk reads it as better aligned than one financed almost entirely with debt. How much equity lenders want is in how much equity you need to buy a company.
Operating partners and silent partners
Lenders want to know who is in charge. A group with one partner running the company, with relevant experience to show for it, reads well. Two or three equal operating partners with no stated division of roles reads less well, because the lender cannot tell who decides when they disagree.
Every operating partner also has to be paid, and lenders count that pay before debt service. A worked example in plain numbers. A company earns 3,000 a year before its owners' pay. With one operating partner drawing 300, earnings available for debt service are 2,700, and at the minimum coverage of 1.25x conventional bank lenders commonly look for, the company can carry debt payments of up to 2,160 a year. With two partners each drawing 300, earnings available fall to 2,400 and the payments the company can carry fall to 1,920. The second full-time salary costs the deal 240 a year of debt capacity, which has to be made up with more equity or a lower price.
Silent investors are underwritten differently: not on skill, but on reputation, the source of their money and what rights they hold. Lenders read the operating agreement or shareholders' agreement for investor vetoes that could block a covenant fix, redemption rights that could pull cash out, and any investor who controls other businesses whose dealings with the borrower should be at arm's length.
Control, deadlock and the change-of-control clause
Every credit agreement defines a change of control, and triggering it is an event of default. In a group purchase that definition is written around the ownership table at closing: a named operator or sponsor keeping control, or a set of owners keeping a majority. If a partner later sells out, dies or is bought out by the others, the group may trip the clause without meaning to. See change of control as a loan default.
The protection is to plan for it in two documents. The owners' buy-sell agreement should say what happens on a partner's death, disability, departure or deadlock, and how any buyout is funded, often with life insurance. And the credit agreement's change-of-control definition should allow the transfers the buy-sell agreement contemplates, so the owners can carry out their own agreement without asking the lender's permission.
The ownership table decides guarantees, control and what a later partner exit does to the loan. Draw it with the lender in mind, then take it to investors.
Setting the table before investors are promised terms
Most of the problems on group deals come from promises made to investors before anyone asked a lender. The decisions to make first:
- Who owns what at closing, and therefore who controls the company and who may be asked to guarantee.
- How each investor's money goes in. Common equity, preferred, or a subordinated loan, and what each does to leverage and to cash leaving the company.
- What investors are paid, and when. Distributions come after debt service and within the loan's covenants.
- How deadlock and exits work, in a buy-sell agreement the lender can read.
- Which company borrows. A holding company owned by the group, with the operating company as borrower or guarantor; see holding company structures for acquisitions.
The documents follow the ownership: the operating or shareholders' agreement, subscription documents showing where investor money came from, the operator's background, and personal financial statements from anyone asked to guarantee, alongside the target's latest full year of figures and the letter of intent.
Midas Partners's package sets out the ownership, the control terms, any guarantors and the sources and uses in one place, so lenders read the group as it will stand at closing. Of the 1,800+ lenders in the book, 1,148 write term and private credit, including lenders that structure without personal guarantees. Lenders see a blind teaser first, and the group approves each one by name before it learns who the buyers are. How Midas Partners reads a deal is in how we underwrite.
Common questions
- Do all partners have to personally guarantee the loan?
- Not necessarily. Guarantees are negotiated in conventional lending. Banks lending to owner-operated companies usually ask the operating and larger owners; lenders backing an institutional capital partner often ask for none.
- If I own half the company, am I liable for only half the loan?
- Usually not. Most guarantees are joint and several, so each guarantor can be pursued for the whole unpaid balance. Limited or several guarantees exist, but they have to be negotiated.
- Does preferred equity count as equity to a lender?
- It does if it cannot be redeemed, and its dividends cannot be paid in cash, ahead of the senior loan. Preferred with a fixed redemption date before the loan matures is treated as a claim on cash, much like debt.
- Can investors lend money to the company instead of buying equity?
- Yes, but the loan is debt. The senior lender will require it to be subordinated, will usually restrict cash interest on it, and will count it in total leverage.
- What happens to the loan if a partner leaves?
- It depends on the credit agreement's change-of-control definition. If the exit changes who controls the company in a way the definition does not allow, it is a default. Write the buy-sell agreement's transfers into the definition at closing.
- Can two partners both draw salaries from the company?
- Yes, but the lender deducts both before measuring coverage. A second full-time salary reduces the debt the company can carry, so roles should be real and pay set with the lender's model in mind.