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.

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.