There are a number of ways to solve the funding puzzle at closing in the world of acquisitions. Mezzanine debt has unique properties that give it puzzle funding superpowers compared to other forms of capital. Most deals try to stretch bank financing as far as they can, only for it to come up short due to collateral shortfalls. By the time the bank is done trimming their loan amount, an unfunded gap emerges.
Investors like their returns and keep their cards close to their vest when disclosing acquisition finance strategies. Equity investors with large funds like to create the impression that they will put all the money into the deal, especially an acquisition finance type deal. If you need $50 million in acquisition finance, and your bank suddenly has short arms, founder owned companies often turn to equity investors to bridge the gap between the bank and the full capital need.
The right capital to use, whether debt, equity or mezzanine debt is not an easy question to answer when deciding your acquisition financing. People usually default to market conventions such as 30% equity and 70% debt. Sometimes they may try an equity light approach, using a thin slice of equity burdened by a big wedge of debt. These decisions require deep thinking to analyze the underlying risk to the acquisition and the future growth of the company.
Mezzanine debt sounds mysterious and hard to grasp. It suffers from a technical name that conveys little meaning to a founder-owned company. Despite its unfortunate name, it delivers in a bold way by funding acquisitions based on three factors that banks are resistant to. These factors include:
Raising acquisition financing can be bewildering for first timers. Acquisition financing providers are hard to identify in numbers sufficient to yield enough strong prospects. First time companies are not well versed in the presentation standards and process requirements. Like any complex process, it is a journey with different stages that requires the right combination of people, process and commitment.