Mezzanine Debt – The Nick Foles of Acquisition Funding

Posted on: January 16th, 2019

Nick Foles of Acquisition Funding Nick Foles is a transformational quarterback who time and time again delivers victories against all odds. His play has galvanized a city and its fans, which in turn fuels his performance and his ability to inspire his teammates to go great things. This cycle of positive reinforcement is not unlike the type of support a company needs to pursue acquisition growth.

Often businesses fall into the rut of thinking they really cannot do acquisitions or engage in hyper growth because they lack sources of funding. Growth takes Foles-like inspiration and most business owners get little to no inspiration from their local banks who peddle only collateral-based, conservative loans. Businesses need Folesian loan structures not Lilliputian loan sizes to succeed at acquisition scale ups.

Many middle market business owners subscribe to a slow, single digit growth rate, because they really don’t have the funding to support faster acquisition growth. They’ve been able to get a collateral based bank loan, and this type of loan becomes their funding reality around which they conform their business growth expectations.

This reinforces a slow, growth mindset which is perfectly acceptable for certain phases, but not as a long-term default position. Companies need to go through growth spurts or scale-ups as they mature. The decision to grow faster, often pursued discretionarily, should be a strategic mandate. The trick is getting the right type of funding to unleash your inner acquisition game.

Mezzanine lenders provide critical Folesian ingredients needed for you to win on your acquisition gridiron. Here are the 5 reasons why a mezzanine lender can provide Nick Foles-type lift for your next acquisition win:

High level thinking – Mezzanine lenders are both experienced and smart. Their review and acceptance of your loan will give you more confidence to matriculate your acquisition. Most have been through dozens of similar acquisitions and can bring these insights into your game preparation.
Operational Focus – Mezzanine lenders focus on critical aspects of your business such as systems strength and management depth. They double check to ensure you have the resources needed go down the field with the acquisition.
Strong Faith in Management – Mezzanine lenders only lend to great management teams that have a complete team than can play 60 minutes. Throughout the duration of the relationship, they try to their best to coach and support you.
Financial discipline – Mezzanine lenders analyze your numbers, like a stats sheet, to identify how and where you are making money. This helps you emphasize high value offensive moves in your operational playbook.
Focus on Winning – The business of mezzanine lending is itself a risky one, with slim margin for error. Most successful mezzanine lenders have developed superior practices to identifying and assisting companies get in the end zone.

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.