Top Three Ways to Climb the Mezzanine Debt Stairway

Posted on: June 17th, 2020

Mezzanine Debt Stairway Growing businesses often struggle to bring in enough capital to make proper investments in their scale up. Often, capital availability to fund strategic growth sadly amounts to what the bank will lend you. Many business owners simply do not want to take on an equity investor and deal with the dilution and intrusiveness.

Mezzanine Debt as an Immediate Stairway of a Growth

Mezzanine debt lenders represent a middle road, between a bank lender and an equity investor and bring enormous value to companies seeking to accelerate. Mezzanine debt structures provide an immediate stairway to a growth, allowing a company to ascend major growth hurdles. Unlike bank loans based on collateral, mezzanine debt loans are based on your future EBITDA, giving you more loan size and real capital support. Whereas bank loans tend to fund equipment or real estate purchases, mezzanine debt loans fund any type of growth expenditure including research and development, sales and marketing, headcount additions and acquisitions.

Conceptually, mezzanine debt use cases flow from the specific growth need of the company, as opposed to one size fits all approach from a bank. This use case flexibility provides an interesting value acceleration framework for growth companies. Mezzanine debt lenders are keenly interested in how you make money and what your key value drivers are.

For the cost of their capital to work for you, they must help you do something big and transformational that you could not achieve on your own. This can be increasing your distribution channel, your product line, or overall capacity. These objectives can catalyzed through making investments internally, making acquisitions externally or a combination of both.

Here are the Attract Capital three top ways to climb the mezzanine debt stairway.

Complementary Acquisition – Most mid-size companies have either distribution or product weaknesses that can be rectified through acquiring a company with complementary strengths. The make vs. buy decision often results in lower risk and faster speed to market through an acquisition to expand the enterprise.
Add -on Acquisition – Acquiring smaller entities is a great way to grow and can bring valuable new accounts or new product into your company. This type of acquisition costs less than a complementary acquisition yet needs higher levels of integration to yield results.
Investment in Innovation – All companies have high potential areas that can be cultivated through more internal focus. Using mezzanine debt to create and launch new products to your existing customer base is a great way to scale in a low risk way.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.