Mezzanine Acquisition Financing – Transitional Capital at its Best

Posted on: December 12th, 2018

Mezzanine Acquisition FinancingGrowing a business through acquisition involves assumption of execution risk, that the acquired business can be integrated and scaled.  Successful acquisition integration and scaling can produce profits and EBITDA at a much faster rate than ordinary growth.

Through it, companies can add new products, new regions, and new operational capacity.  It’s like compressing five years of ordinary growth into one or two years and it creates the need for transitional capital.

Transitional capital is the key to successful acquisition strategy.  It funds the upfront purchase price and ongoing liquidity needs of the business during integration and scale up phases.

This capital goes in on the front end and takes a back seat to the cash needs of the business with respect to repayment.   It allows your company to invest, integrate, and evolve into a larger, more profitable entity, at which time it will have the ability to repay.

Transitional capital is flexible. Through allowing the company’s needs to come first, a transitional capital provider gives you more optionality, increasing the probability of a successful outcome.

When you can keep more cash in the business, you build a liquidity buffer which offsets unforeseen costs or delays.  Acquisition bank loans usually require immediate principal repayments right after closing.

This means cash is going to repay the loan, at the same time you are investing in integration and scale-up. This adds pressure to your finances and increases execution risk at a time when your team should be thinking and investing for the long term.

This misaligns the term structure of the loan and the acquisition, as all acquisitions are long term in nature and need to be funded with long term capital.

Mezzanine Acquisition Financing is best way to address this issue and ensure you have a balanced plan of attack.  Here are 4 reasons why Mezzanine Acquisition Financing is transitional capital at its best:

  1. These loans are primarily interest only– principal payments are deferred for 2 to 3 years and some cases, for the entire term of 5 years. The lenders actually want you to use the money to drive growth, and then repay the principal amount on the back end.  This perfectly aligns with your capital budget and gives you financial flexibility.
  2. These loans can be tailored– if you need some of the money at closing and more later on for something else, the loan structure can be tailored to your specific requirements. Add on acquisitions are a large part of mezzanine lending and can pay big dividends for your growth plan.
  3. These lenders have a more patient attitude – Mezzanine acquisition lenders are paid higher interest rates, which allows them to take more risk. They are fundamentally more patient and allow for longer projection periods than banks. They will fund into your transition and remain patient as you create a successful scale up over the first several years.
  4. They will give you a bigger loan – Mezzanine lenders lend off of your cash flow value and can usually give you a much higher loan amount than a bank. They will help you fill that hard-to-reach gap in your financing budget.  This allows you to fund the entire growth plan from beginning to end.