Mezzanine financing can be used to fill a gap in a company’s financial structure between debt and equity or a gap in the supply of capital in the financial markets. This gives mezzanine financing extreme flexibility. As a result, mezzanine financing can be applied to many different basic transactions, including buyouts, growth and expansion, acquisitions, and recapitalizations. Mezzanine financing is very useful for a buyout.
A management buyout, or MBO, is when a business interested in making an acquisition does not have the necessary funds to complete the transaction without obtaining an outside loan or a promissory note with the original owner. When a senior management team leads a management buyout of the firm, mezzanine debt can fill the gap between senior debt claims and equity. A leveraged buyout, or LBO, is a specialized form of M&A where a company interested in performing an acquisition accomplishes the arrangement by exploiting outside finances or an arrangement made between the buyer and seller as a promissory note to be paid over time. When a leveraged buyout requires a large amount of debt, and not all debt can be senior, a significant amount of the financing can come from a mezzanine lender. The company’s debt ratio is very dependent on the risk level of the buyout. If the purchaser is established and has strong cash flows, then the lender can cover as much as the full amount of the acquisition.
What makes a mezzanine loan so attractive is its diverse structure and easy-to-use qualities. Loans are often long-term with 5 to 7 year maturity dates. There is no personal guarantee and the principal repayment is deferred for several years. No matter how you want to use mezzanine financing, it will always deliver abundant value for your business. It is beneficial for your business to find a proficient financial advisor with the familiarity and training that can connect you with the accurate funding routes.
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