A private equity fund values companies on the basis of a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). To assist you with the basics of most private equity deals, let’s use a “three layer cake” analogy consisting of senior debt, mezzanine debt, and private equity.

This structure is the most commonly used in private equity investment. This structure is generally used in a leveraged buy-out or a change in control transaction because it allows the private equity fund to leverage his down payment to purchase the target company. As you will see, each layer is different and has its own unique characteristics and each layer has its own risk/reward profile.

Just because a 3-layer cake structure is the most common structure does not mean that it is the only structure that can be used. Most brokers promote private equity oriented deals because they are most common. However, unless you are interested in selling 100% of your company, private equity investment is generally not the proper approach.

Each layer of capital can be used on its own or in conjunction with other layers in varying degrees for any given transaction. There is no rule that requires private equity to be used in every transaction nor is there a rule that requires senior debt or mezzanine debt to be used in every transaction.

Each of these layers has advantages and disadvantages and can be mixed and matched to fit the unique needs of each business. Private equity is the most expensive form of capital and the most control oriented. Private equity investment, unless structured as a minority investment, will result in a sale of the company. Mezzanine debt, as a hybrid form of capital, is a balanced form of high-value capital.

Through understanding these basic rules and structuring technology, we are able to help business owners design optimized structures that meet their needs, as opposed to the needs of the private equity investor. Instead of using the traditional three-layer cake structure that can be expensive and complicated, Attract Capital has created a streamlined, two-layer cake structure. This structure provides flexible, long-term capital at a significant discount to the 3-layer cake structure. It allows us to provide our clients flexible long-term capital for growth, without having to sell their company to a private equity fund.

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.

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