Scaling Mezzanine Debt Closing Hurdles

The mezzanine debt closing process involves a number of stages subject to varying levels of borrower control. Some of these things are 100% within the control of the borrower and others are far outside their control. The diligence process consumes the majority of the time, and it is highly dependent on the quality of the financial information. This is usually the single biggest hurdle in the mezzanine debt closing process and is also the most controllable from the borrower’s perspective.

Financial statement preparation should be prioritized before the deal even begins. This shows a level of professionalism and lender engagement readiness that will resonate with the lender.  Companies that take the time to elevate their financial reporting before even approaching the lender are keenly attuned to the due diligence requirements of the lender and speak their language.  When making an acquisition, this means conducting a quality of earnings review with a respectable accounting firm for the target company.

Key Steps in Mezzanine Debt Closing: Balancing Borrower Control and Third-Party Dependencies

For your company, it means making sure you have at least historically reviewed financial statements for several years. A reviewed standard means a third party, respectable accounting firm has conducted an examination of your general ledger and trial balances, without proving the validity of certain accounts such as inventory or accounts receivable. Other key control variables involve the ability to respond to mezzanine debt lender information requests. This again is 100% within the control of the borrower as long as they do some homework on the standard mezzanine debt information requests. The information request list is focused on learning more about the products, customers and operational processes of the company.

It will include requests for schedules such as revenue by customer and product, gross margin by customer and product, description of operational flows, description of sales process and new customer generation. Preparing these information files beforehand pays big dividends to the mezzanine debt closing process. Aside from these completely controllable stages, there are third party steps that most borrowers only indirectly influence. These include obtaining consents for material agreements such as licenses, leases and vendor and customer contracts. The further you get out in front of these third-party work streams and prioritize them, the more it pays off but you are subject to the turnaround speed of the counter-party.