The middle market can be divided into three distinct segments: lower middle market, core middle market, and upper middle market. Companies with EBITDA below $10 million are generally classified as lower middle market, companies between $10 to $75 million of EBITDA are considered the core middle market and companies above the $75 million distinction are generally termed as upper middle market companies. The lower middle market consists of family- or entrepreneur- owned businesses. The upper middle market most often is publicly held or sponsor backed businesses.
Lower middle market companies often receive their financial capital from a local banking source. However, when a growth opportunity or acquisition deal presents itself, these smaller banking sources may struggle with the larger quantum of capital required. This is where mezzanine financing comes into play- the mezzanine sector provides capital that fills the gap. The gap is that last bit of capital required to grow either through internal expansion or through an acquisition. Every capital requirement has at least two layers – easy-to-raise capital and hard-to-raise capital. Most banks can fill the easy-to-raise layer. It is those intrepid and discerning capital providers, such as mezzanine lenders, that are able to go deeper in the capital structure and provide the capital needed for the hard-to- raise layer. Without this layer, the Company does not move forward and its growth plan is thwarted. Senior debt can be difficult to secure and electing to go the equity route is not always a promising substitute. Mezzanine financing although, can fit this gap entirely. Mezzanine financing is cash flow based, rather than asset based. Mezzanine lenders understand businesses are built on growth, innovation, and expansion. Therefore, mezzanine capital operates on a long-term basis, as mezzanine providers are patient sources of financing, willing to wait for several years to collect the principal and interest back. Mezzanine financing has a large advantage, in the fact that, it requires no principal payments, only interest payments, throughout the first three or four years of the loan and the loans mature in five to seven years. A clear advantage of mezzanine capital is the flexibility it offers to both the borrower and the lender. Companies that have stable financial performance, a strong plan for the future, and revenue greater than $20 million are prime targets for mezzanine capital.