The Complete Due Diligence Checklist for Mezzanine Financing

Mezzanine financing due diligence takes serious commitment from a borrower. Lenders look at every nook and cranny imaginable to understand the business and deem it creditworthy. Mezzanine financing diligence workstreams run parallel and are geared at obvious measurables and subjective understanding. The lender probes and dissects the company’s financial history, operational strength and the company’s ability to manage change and adapt. Discerning mezzanine financing providers use due diligence to unearth grit and resiliency, two keys that drive long term growth. Diligence is an assaying process as to cultural ingredients and a proof of financial strength and competitive differentiation.

6 Critical Areas Lenders Review Before Approving Mezzanine Financing

The complete due diligence checklist for mezzanine financing includes 6 separate categories. They include:

1. Financial Analysis- all mezzanine financing providers require a quality of earnings review financial as well as detailed breakdowns of profitability by product and customer. They will accept historical adjustments to EBITDA provided they are logical and defensible.
2. Industry and Market Sizing – the lender needs to understand market trends and size from an independent perspective. Explaining how your company folds into the overall market and industry trend is important.
3. Human Capital Evaluation – talent drives everything especially in middle market companies. Mezzanine financing is skilled at identifying and incentivizing strong talent. They focus on making sure the company has the right team and the right talent level.
4. Competitive Evaluation – your place in the market and the value chain must be known. It is not enough to say functionally what you do, but you must explain the subtle points of differentiation and value add.
5. Background checks – this step can be a deal graveyard if not managed properly. All lenders want to make sure their management teams are clean and use in depth background checks to dig for any prior legal issues.
6. Legal Review – The lawyers will run their diligence on reps & warranties, financial disclosure and collateral and security agreements. They will make sure that if the loan is not repaid, their client is protected in the downside.

Companies that invert this diligence checklist and run their own internal diligence before getting to the lender are in a stronger position to move through this. The process can become drawn out and protected especially if there are multiple third-party diligence vendors who work at their own speed.