Mezzanine Debt – Funding for Big Growth Steps

Posted on: November 3rd, 2020

All corporate growth conforms to a pattern determined by the type of growth step involved. Early stage growth is characterized by large revenue growth driven by new customer acquisition. A big growth step involves a quantum leap forward and usually results in growth of 50%+ in revenue in a single year. Whereas lower rates of growth can be funded through existing cash flow, companies often lack available financial resources to fund big growth steps.

The bigger the growth step, the more risk it poses to the existing business. It has the potential to be disruptive to the company’s day to day operation and can easily pressure all the company’s existing resources including financial, human resources and operations. To safely attempt a big growth step, companies must ensure they have a plan to scale all internal resource pools to ensure profitable assimilation of the new business. It matters not if the growth step is an acquisition or strategic diversification. The key is in the detailed planning to scale the size of the enterprise.

Big growth steps represent transformational change for a business and often result in large valuation gains for the company. Big growth step implementation requires a high-level lender, who understands the underlying necessity of scaling and can provide a high value loan structure rich in proceeds and repayment flexibility.

Mezzanine Debt – A Source of Big Growth Step Funding

Mezzanine debt lenders are one of the best sources of big growth step funding for growing companies, as they are experts at understanding and funding these types of deals. This is especially true with middle market acquisitions. Rather than focus on collateral value, mezzanine debt lenders analyze the existing cash flow level and the cash flow growth potential of your growth step.

Through focusing on the operating fundamentals of the business such as market share, customer base, product line and management team, mezzanine debt lenders gain comfort as to the strategic sense and operational complexity of your deal. Through this approach, they structure your loan based on the scaled-up business, bringing huge value in the form of a large sum of growth capital.

Mezzanine debt lenders allow you to pay back the loan at a leisurely rate with most of the principal due at the maturity date in five years. Through their expertise in understanding transformational growth, mezzanine debt lenders simultaneously provide larger loans and mitigate their default risk through identifying borrowers with scale up capability, who will successfully integrate their acquisition and achieve dramatic enterprise-wide cash flow growth.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.