The Scalability Hack from Mezzanine Debt

Posted on: January 9th, 2022

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Deal entrepreneurs executing roll-up strategies always seek best practices to find and rapidly acquire businesses. The sourcing of deals has become more automated through platforms and digitized outreach. Mezzanine debt sourcing has become more digitized for roll-up acquirers as well. Still, most mezzanine debt lenders use traditionalist approach which emphasizes relationship building.

Mezzanine Debt as an Alternative to Fund Deals

Roll-ups involve a high velocity of acquisitions and require lenders with scalable funding structures. Too often acquirers focus on one-off loans from a variety of sources to just get the deal done. This one-off approach may provide capital for today’s closings but not necessarily provide capital for subsequent deals. Mezzanine debt lenders provide a great alternative to one-off deal financing in the form of a future acquisition facility, which can be used to fund deals after the initial closing. This type of facility is crafted in a bespoke manner and provides a high degree of flexibility in draw down amount and closing timing.

Acquisition facility functionality gives mezzanine debt structures an elevated level of scalability which is critical to the achieving roll up breakaway speed. Acquisition facility mezzanine debt structures allow an acquirer to close several deals simultaneously and to optimally stage follow-on deals, to mitigate execution risk. Having capital lined up on the front end establishes the acquirer as a preferred buyer, giving them a competitive edge over garden variety buyers. When you can stay with a quality lender for several years during a roll-up, you move faster and build value more quickly.

Moreover, you avoid the sinkhole of cost from prepayment fees, new fees and extra time associated with refinancing. There is immense value from working with a mezzanine debt lender who can support your initial acquisition roll up journey. When your mezzanine debt facility can grow from $7 million to $15 million of total funding, you have successfully hacked the scalability equation and added a new best practice to your acquisition toolkit.

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.