Family Business Audiocast | Episode 54 | John Koeppel

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R. Adam Smith: Welcome to the Family Business Audiocast. I'm R. Adam Smith, creator of this series, and a warm thank you to our live audience today and for those listening later. On this episode, I'm joined by John Koeppel, partner in private equity and independent sponsor leader at Lippes Mathias LLP. John is one of the foremost legal advisors in the independent sponsor and private equity ecosystem. Great to have you here today.

John Koeppel: Great to be here, Adam. I'm excited to chat for the next bit on family offices and direct deals. It's going to be great.

R. Adam Smith: I'll talk about you briefly, then we'll dig in. John has structured, negotiated, and closed 250 transactions across the space, including family offices, private equity, independent sponsors, and strategic buyers. With more than two decades of experience as a corporate deal attorney, John leads the Lippes Mathias private equity and independent sponsor practice, with offices in Buffalo and Tampa. Nationally, he counsels buyers and sellers on M&A as well as capital formation, and is known for a pragmatic, results-focused approach to complex small- and mid-cap transactions. Before Lippes, he spent 17 years at Nixon Peabody. Lippes Mathias is a U.S. business law firm with over 200 attorneys across multiple offices, recognized for its strength in private equity, corporate and finance, and family office advisory services.

Today we'll unpack how independent sponsor deals — sometimes called fund-less sponsor transactions — are reshaping private markets. This is an area of expertise for me going back to 2002, and one I've been passionate about as a leading practitioner nationally, so it's great to revisit it as the industry has expanded dramatically. We'll also talk about why direct deal-making has become the next frontier in private equity. John, tell us a bit more about your role, and we'll jump in.

John Koeppel: Thanks, Adam. I've been at the firm for over a decade now, and we've grown the practice with a client base that looks a lot like your audience — family offices, independent sponsors, those making direct deal investments. It's a great space; the direct deal market, especially in the lower middle market, is very active. Looking forward to diving into it today.

R. Adam Smith: Who are independent sponsors, and why does this matter now? I'd like you to frame the sponsor model, contrast it with a traditional private equity fund, and also contrast it with the original search fund model defined by Stanford Business School back in the 1980s.

John Koeppel: Looking across our client base on the independent sponsor side, we tend to see two buckets. One is former private equity, investment banking, or consulting professionals who were either frustrated in those roles or saw an opportunity to start their own firm. The other is the operator-executive — someone who's done something very successfully in an industry, perhaps at a private-equity-backed portfolio company, and now wants to do it on their own.

I've been doing these kinds of transactions since I was a young associate 27 years ago, when they were sometimes called late-'90s fund-less sponsor deals. Now there's an entire ecosystem — events, podcasts like this one, capital partners, SBICs — supporting them. Because of that ecosystem and the sheer number of opportunities, we're seeing much higher use of this model, with some real strategic advantages over traditional private equity funds that we'll get into.

On your search-fund comparison — we have some clients like that too. I think of the search model almost as someone buying themselves a job — maybe a smaller business, like a plumbing company, financed with an SBA-guaranteed loan. Those are valuable transactions in the economy. Independent sponsor transactions, by contrast, are ones a strategic buyer or a larger fund could just as easily do — the biggest distinction is that the sponsor doesn't yet have the capital to close, and that comes together as part of the deal.

R. Adam Smith: Let's talk about flexibility. I led 14 SPVs myself previously, including 10 buyouts, with a lot of investor conversations at the GP level, not just the LP level, discussing different structures. There's complexity in structuring these deals, but also greater flexibility that helps get the deal done with capital partners and sellers alike. Talk about that flexibility, which is also relevant to a family office backer or sponsor.

John Koeppel: That's probably one of the biggest advantages. I'm often asked why our independent sponsor clients win deals, especially compared to a strategic buyer. It's the flexibility with the target — rollover equity, deferred consideration, earnouts, things like that. The beauty of the model is you can do deals across different verticals, sizes, and investor groups, and as long as you have attractive opportunities with the right expertise at the table, you can structure win-win transactions.

One of the most common tools we've used, especially since the tax law improved in July, is QSBS — Qualified Small Business Stock — which can offer substantial capital gains tax advantages to investors. Flexibility in structuring is really one of the biggest advantages of these transactions.

R. Adam Smith: I'm seeing meaningful expansion in direct deal-making beyond the traditional private equity fund, between family offices — or entrepreneurs without a formal family office but similar resources — and deal sponsors. On the seller side, there's the succession-planning opportunity for family-held businesses; on the money side, there's a desire for transparency, since a sponsor backer, like a family office, gets a lot more visibility than they would investing in a company without an investment banker involved. Which gets back to the point that many of these deals happen without investment banks at all.

John Koeppel: That's right. Many of the independent sponsor transactions we see run from around $10 million of enterprise value up to $100 million — we do see deals over $100 million EV in this space, but not as many as you'd think. Often the independent sponsor has identified the company on a proprietary basis; it's not on the market. If there is a banker involved, it tends to be a smaller regional "main street" banker rather than a broad process. The sponsor builds a relationship with the business owner and sells them on a grander vision — take some chips off the table, and gain a smart, capitalized partner to help continue scaling. That's attractive to a business owner.

From the family office side, there are certainly advantages to investing in traditional committed funds, and family offices will keep doing that. But direct deal investing offers lower fees, full visibility into a single opportunity — you see the whole model, live it, breathe it — and depending on check size relative to the deal, you may get a board seat and other governance and protection rights. That gives you a ton of information. And, not too surprisingly, many family offices and other investors tend to invest in industries and deals similar to ones they've done well in before.

R. Adam Smith: Let's talk about platform building — one of the most important areas of the family office industry, which I discuss often on this podcast, including recently with Henry Brandts-Giesen, co-head of the Family Office Practice at Dentons. From a lawyer's perspective, talk about platform building — roll-ups, tuck-ins, consolidations, but really enterprise building for wealth creation. Having been part of three private equity platforms myself, there's real value in platform building, but also limitations to the private equity model for it, versus building a platform from a family office perspective — a Pritzker, a Heritage, a Perot, and so on. Since we've talked about flexibility, let's talk about platform building, and then financing next.

John Koeppel: Some of the most successful independent sponsor transactions I've seen involve a seller who's built an amazing business, taken it from zero to some threshold, and is essentially tapped out — lacking the capital, wherewithal, or experience to scale further. An independent sponsor comes along with their own pedigree, operating partners and advisors, and perhaps some smart family alpha capital, and builds a strategy: here's how we grow organically, and here's how we do tuck-ins.

We're all familiar with the concept of multiple arbitrage — buying businesses at 2, 3, 4, or 5 times EBITDA, growing them to 10, 15, 20 times EBITDA, and capturing higher multiples along the way. Once a platform has been scaled, there's a whole larger audience of strategics and bigger private equity firms who'd love to buy the business post-scale — they have zero interest in a $3–5 million EBITDA company still running on QuickBooks that needs years of hands-on work to professionalize and integrate smaller add-ons. That's a tremendous value-add a successful independent sponsor, with the right people around the table, can deliver.

R. Adam Smith: On the tax side, talk about long-term capital gains right now — what's happening with recent tax rulings, and how that's different from the past.

John Koeppel: There's a rule that's been on the books a long time but that we're seeing used more and more — Section 1202 of the tax code, also known as QSBS, Qualified Small Business Stock. If you buy or invest in a business with less than $75 million in tangible asset value, structured as a C-corp, and hold for a minimum of three years — with the highest benefit at five years — you can eliminate most, potentially all, of your federal capital gains tax on selling the stock, and most states opt into the program too. There are also efficiencies available with flow-through structures involving depreciation and losses. The government's tax policy has always incentivized growth in small and mid-size companies, and QSBS is something we're using on probably 70–80% of the deals we're working on right now.

R. Adam Smith: What was that number a couple of years ago?

John Koeppel: Probably close to zero before 2017–2018, when C-corp rates were so high. It's taken a few years for word to spread about the program and how to structure it — maybe we were at 30–40% before. But since the changes in July, one drawback of the old program was the required five-year hold; under the new version, a three-year hold gets you a 50% tax reduction, and a four-year hold gets 75%. So it no longer has to be a full five-year hold, though there are technical rules around potential rollovers that can affect that. As more people understand the pros and cons, they're realizing it's a real game-changer for after-tax returns on a future exit.

R. Adam Smith: Family offices and entrepreneurs looking to buy private companies outside of an auction, or a busted auction, or working with a deal sponsor, can reach out to John on LinkedIn — John Koeppel, K-O-E-P-P-E-L — or through the Lippes Mathias website, which I assume has articles and guides on independent deal-making as well.

John Koeppel: It does, yes.

R. Adam Smith: Let's talk about how these one-off independent sponsor deals get financed, excluding platforms. In my own deals, I worked with great GP partners who sometimes backstopped or led 50–100% of a transaction in the lower middle market or small-cap space; other times we co-led, or syndicated with structured capital, structured paper, or mezzanine — and then there's SBA financing too. Walk through some of the different financing structures, and then let's talk about how economic waterfalls get created.

John Koeppel: Early in a transaction, when we're working on the letter of intent with the target, one of the first questions is: how much is the seller contributing — rollover equity value, seller financing, or earnouts? That varies deal to deal, but it's not uncommon for a seller to finance or roll roughly 20% of the deal, sometimes more, sometimes less.

Once we account for the seller's piece, we solve for the rest. Say it's a $50 million transaction and the seller rolls or holds paper on $10 million — we need to solve for $40 million, excluding transaction costs. There are one-stop solutions: a family office providing the bulk of equity plus some debt, or SBICs, which are big players today and can provide debt and either all the equity or co-invest alongside a family office.

I also have a client who closes what I'd call old-school transactions — traditional senior debt, maybe 2 to 2.5 times EBITDA, backstopped with equity from family offices and high-net-worth or ultra-high-net-worth individuals. The beauty of the independent sponsor model is that institutional investors like SBICs and mezzanine firms love having family offices and other equity partners at the table. The one constraint every lender and investor asks about: will there be enough capital not just to close, but for add-ons, or to support the business through a rough patch? Having smart, deep-pocketed partners at the table is very attractive to all stakeholders.

R. Adam Smith: You mentioned "old-school" deal-making — I think of that as buying a distressed company with debt and seller paper, putting in a dollar of your own.

John Koeppel: That's right — most banks want to see $2 or $3 today, but yes, that's the classic version.

R. Adam Smith: The relationship between the independent sponsor and the capital backer takes many months to build, and sometimes deals don't leave room for that. It's important to have long-standing relationships or a repeat backer, because sellers or bankers may not have the patience, or might run a broader process instead. Talk about that time and relationship management between backer and sponsor.

John Koeppel: It's one of the hardest dynamics in this space, since sponsors typically don't already have committed capital. Most of our clients try to build those relationships as early as possible — "Hello, family office, hello capital partner, here's my thesis for a roll-up in cybersecurity, healthcare, franchise restaurants, whatever it is." You may not have a binding subscription agreement yet, but you can get buy-in — investors saying, "I love the team, I love the strategy, give me a call back once you've signed up some targets." That's a much better scenario than a cold call when the real opportunity finally comes in.

Deals come together in different ways. Sometimes there are two or three significant investors at the table, one with a strong pre-existing relationship with our client from a prior deal or fund — they might say, "Here's a $20 million check, we'll take $12 million and backfill the rest with co-investor partners from other deals." How the cap stack comes together varies a lot by deal, and since the average deal only has plus or minus 90 days from signed LOI to close — sometimes extendable, but a tight window for accounting, quality of earnings, legal diligence, and raising debt and equity — the more you can line up before that clock starts, the better.

R. Adam Smith: In my experience, the window from initial discussions to a signed LOI is usually 45 to 60 days, sometimes 75 to 90. During that time, it's critical, on a profitable company, to get the debt lined up — I always line up debt first.

John Koeppel: Yep.

R. Adam Smith: Others do it differently. From the family office perspective, talk about lining up the cap stack of third-party tranches — what timing and sequencing works best? Do you see faster-moving sponsors tapping into a family office's network for preferred lenders? I've also seen situations where lenders needed to be swapped out, creating tension between speed and lender preference from the buyer's side.

John Koeppel: Relatively speaking, debt is usually easier to find than equity — everyone can look at EBITDA and figure out an appropriate multiple. Equity is always the harder piece. Many clients get a "debt read" even pre-LOI — how much debt can a business like this support — sometimes getting preliminary indications of interest or term sheets from lenders or SBICs to gauge the debt side of the cap stack and figure out the remaining equity gap.

We've also seen it the other way — a client doing a roll-up in a very niche vertical found a family office backer with preferred lenders they've worked with before, helping finance the deals. In some smaller roll-up strategies — say $1–2 million EBITDA businesses, planning to acquire 10 or 20 of them — the first half-dozen might be done with all equity. Once the platform has some real structure, a CFO, shared services, and is at $5–10 million EBITDA, then real debt becomes available, since you're not going to get debt on a $1 million EBITDA business. It really depends on having those conversations early with your partners to figure out what makes sense — and sometimes swapping lenders in and out to find the best mix for a particular deal.

R. Adam Smith: One approach I've used as a sponsor: get the debt done with someone who can move quickly on an initial senior debt or full debt structure, negotiate attractive early call redemption terms and cost of funds, hold them in the deal for a year or two, and then refinance.

John Koeppel: That's right. Another thing we see often — the incumbent bank or lender to the target business, if things are going well, often wants to stay in the deal, and can move fast and aggressively because they don't want to lose the credit relationship. We always recommend clients ask about the size and scale of the incumbent bank early on and get a proposal from them as well.

R. Adam Smith: Let's move to sourcing. Without a deal, there's no deal. I've seen hundreds a year since I started sponsoring deals in 2002 — 23 years ago now — and built a large deal network that keeps flowing, especially in the small-cap space, through smaller bankers, investment bankers, accountants, and lawyers. Some networks specifically funnel independent sponsor deals, but most are still off-market. I don't think that's changed much, but as a lawyer you're kind of in the middle of it — you see deals and pass things around, unlike a banking model where you control the process and get paid for managing it. Talk about deal sourcing — where do the good deals come from?

John Koeppel: I think that's largely unchanged. Some of the most attractive deals our clients execute are proprietary sourced deals. There are pros and cons — proprietary means there's little or no competition around the table, but the average proprietary deal, from initial contact to close, can take nine months or longer, compared to a deal with a banker involved that moves faster.

R. Adam Smith: I had one that took twelve months.

John Koeppel: Exactly — and those can still be some of the most successful transactions, as long as you're prepared for the timeline. Many of our clients are also active at industry trade shows, and compared to five years ago, we're seeing much more targeted theses — "we're going after aerospace supply companies" or "healthcare businesses that look like this." That lets you hone your talk track with accountants, lawyers, regional investment banks, and industry conferences, to surface the best proprietary or semi-proprietary deals, where you come across as credible to the intermediary — and ideally meet the seller early, put an offer in front of them quickly, and keep them from running a broader process. Those are the deals our independent sponsor clients often win.

R. Adam Smith: And getting the first one done is the hardest part, right?

John Koeppel: There's nothing like it. I always tell clients: maybe your first deal isn't the most attractive, maybe the economics with your capital partner aren't the best you'll ever get, but there's a night-and-day difference between closing your first deal and not having closed one at all. It's not for the faint of heart, but once you do it, you're on the map — for additional acquisitions on that platform, or even starting a second platform, it's a game-changer.

R. Adam Smith: I went on to do 14 SPVs after my first one, and I didn't know at the time I'd do that many. The first one was tough — I want to thank my friend Scott and others for that scrappy process closing a couple million dollars back in 2002.

John Koeppel: Great.

R. Adam Smith: Family offices building wealth in illiquid companies — working with me on their platforms, or on this podcast — want well-priced, attractive private companies, whether tuck-ins or independent deals. The platform model is probably increasingly interesting to family offices, since sometimes individual deals are too small on their own. There's the benefit of full control in the GP/LP mix, greater transparency in due diligence and quality of earnings, or a co-investment model with other capital partners. What's most attractive to a family office in an independent sponsor deal, and what does the best structure look like?

John Koeppel: From the independent sponsor's perspective, capital tends to come in one of two ways. In one model, a control-oriented private capital group that does both direct deals and backs independent sponsors will likely take over the deal — controlling the board and driving much of the process, with the sponsor somewhat along for the ride.

In the model we're focused on more today — whether an SBIC lender with family office capital, or family offices alongside traditional lenders — it's much more collaborative. It depends on whether the family office has done deals in that space before; if so, they can add tremendous value. For example, I have a client doing a roll-up in the for-profit education space, and their family office partner has done well in both that space and real estate, so we've added a sale-leaseback component to some deals, leveraging the family office's real estate partners.

It really depends on how active the family office wants to be. Some say, "We don't know this industry that well, but we understand at a high level why it's attractive, and we love that you've built this acquisition platform — we want a board seat or observer rights and appropriate minority protections." If they trust the sponsor's track record, they may take a more passive role. There's no right or wrong answer — we've seen it both ways. In its simplest form, there's an unwritten rule some people call the Golden Rule: he who brings the gold makes the rules. If I need a $20 million equity check and you're providing $19 million of it, you're going to drive a lot of that process. If instead that $19 million comes a third from an SBIC, a third from one family office, and a third from my own investor group, that's a different dynamic — the governance and board structure will look different too. We've seen all flavors, and it depends on the particular deal.

R. Adam Smith: Let's talk more about that collaborative model between parties. We haven't touched much on the SPVs I mentioned — 14 buyouts, 10 control deals, 8 larger buyouts, 10 boards of directors, $665 million of enterprise value, 75 LPs. None of that would have happened without sellers getting involved. I also worked sell-side with RSM and Sage, so it wasn't just free-access deals without some banker protections, friction, and controls. I was fortunate to have a lot of deal flow, and also some luck picking less competitive processes. But most independent sponsors don't have experience buying a company independently, let alone deep relationship expertise with a founder, entrepreneur, or family enterprise. What do you see in that dynamic, and what makes it easier for a seller to lean in and go through diligence — and then sign an LOI, which is a big step for a seller since it grants exclusivity?

John Koeppel: This is one of the trickiest dynamics in every independent sponsor deal. I always tell clients there are really three parties at the table: the seller, you as the sponsor, and your capital partner — who may or may not actually be at the table yet. That's a tricky dynamic when you and a sponsor are talking to a seller who needs to believe in you and your thesis, sometimes without even knowing yet exactly who the capital partner will be. You're asking the seller to take a leap of faith: partner with me, take some chips off the table, and we'll scale this together.

In some deals, the capital partner is known and even named in the LOI, with support letters or early meeting involvement; in others, we sign the LOI committing to bring capital to the table and then have to go find or solidify that partner — sometimes 30 days or so after the LOI, we'll tell the seller, "Great news, I've found this family office, this SBIC, they want to meet you, make sure you're comfortable with them." It comes together in different ways, but that dynamic — especially when relying on a seller who's staying in the business with a strong management team you need aligned with the vision — is critical to get right.

R. Adam Smith: We've covered a lot today. I think it's important to note the mentorship role lawyers, and sometimes accountants and bankers, play for independent sponsors — the law firm relationship is especially important. What do you focus on mentoring an independent sponsor client through, given all the complexity, risk, timing, and cost involved? What do you pride yourself on personally, and at Lippes as a firm?

John Koeppel: The beauty of this space is that you have to have real passion for it. I love helping entrepreneurs who could easily stay in comfortable private equity, investment banking, or executive roles, but instead take a leap to launch and grow their own firms — which can be very rewarding, professionally and financially, but comes with real risk. We're often a guiding hand — here's what we've seen, here's the blocking and tackling you need in the first few months as you scale, you won't close every deal, there will be bumps. We're part lawyer, part therapist, saying, hang in there, you'll get through this.

Some clients close their first deal in six to twelve months. I have one group that took almost two years for their first deal — they've already closed two this year, with two more under LOI, and will probably close four platforms in one year. That takes real persistence and grit. We try to be a thoughtful guide, provide pragmatic advice, and make connections — to people like you, Adam, and others — the right accountants, other advisors, capital introductions, placement agents, whatever's needed. If they succeed, we succeed. Happy to have any of your audience reach out, whether they're a family office looking to invest in this space, or an independent sponsor — or someone considering becoming one.

R. Adam Smith: Wonderful to have you here today on a topic I've wanted to cover for a while, given how relevant it is to friends in the industry doing deals, as well as LPs and backers of these private companies, and the opportunity to scale and create significant, tax-adjusted returns over the long term. Any final words of wisdom for our audience?

John Koeppel: Someone at a recent conference called it a "get-rich-slow scheme." But for those who are thoughtful and pragmatic — finding the right investors, the right support team — you can have a lot of fun and help a lot of small businesses grow, which are such an important part of the economy. Adam, thanks so much for having me on today. Great discussion.

R. Adam Smith: I'm passionate about this space too, having been part of this movement and a leader in it back in the 2000s and 2010s — exciting to see it expand and gain adoption as a concept and structure. Thank you for joining today, John Koeppel. This is R. Adam Smith, signing off. Please stay tuned for the next episode of the Family Business Audiocast.

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