Speed your roll-up with a mezzanine lender

Posted on: June 28th, 2017

When you start the roll-up journey, you need to know that the lender will be there to finance future deals in the roll-up. Scalability is the key with a roll-up lender. It is too costly in time and money to redo your capital stack for each new acquisition.

Finding a new lender for each new deal will seriously slow you down. It is imperative in the roll up planning stage to target a flexible lender who can increase the loan size, as you make add on acquisitions.

Often acquirers search for the cheapest bank loan in the market to start their roll up. This approach is not advisable as banks will rarely deliver the loan size you need to be successful.

Acquirers should look at cost of a loan in a more holistic and comprehensive manner. The interest rate on a bank loan may be low, but the bank may not want to do your next deal.

The opportunity cost of not being able to do your next deal is huge. The loss of time in rolling up because of the lender’s reluctance to fund your next acquisition is also a significant cost.

The opportunity cost and the delay cost should figure prominently in the roll up decisional calculus. Roll up companies need to ensure that they have developed a capital plan with a solid foundation which include the following elements:

The right amount of equity to start – lenders will want to make sure that the buyer has skin in the game. Lenders are always easier to scale if they know the buyer has something of risk in the deal. Do not try to do a deal with minimal to no equity contribution. Leveraging close to 100% of the acquisition is a risky decision, and leaves you virtually no room for errors. One hiccup and you may be liquidity constrained.
A mezzanine lender in place– mezzanine lenders are great roll up partners due to their EBITDA orientation and ability to fund multiple add on acquisitions. If you have a good team and a good plan, they can fund a series of acquisitions and even put in place an acquisition facility. Mezzanine lenders are very connected to the cash flow dynamics of your business, and acquisition scale up scenarios. They are patient long term lenders with the risk tolerance of investors.
Good financial reporting –Being able to get information out quickly to management and your lenders is important in a roll up. This allows you to spot issues and deal with them quickly. This also gives you an ability to benchmark your EBITDA on a post-closing basis. Lenders are very interested in your demonstrated EBITDA improvement.
Well Structured Acquisitions – Add on acquisition multiples should be in line with your keystone acquisitions. There should also be seller paper or an earn out to the deal. Acquirers should always have a large pipeline of acquisition prospects.

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.