Huge Acquisition Growth Runs with Mezzanine Financing

Conventional corporate finance theory suggests that equity is the primary key to driving big acquisition growth, not mezzanine financing. That equity due to its risk-return tolerance can deliver more capital to a deal than mezzanine financing can. Equity is certainly a strong form of capital, yet it is not the be-all and end-all.

Many roll-up acquisitions, especially founder-owned platforms, use mezzanine financing to fund huge acquisition growth runs, without the dilution and intrusion of private equity money. Many founder owned platforms end up taking equity when they do not need it due to the structural focus of investment bankers on private equity funds.

Mezzanine Financing Offers an Alternative to Equity Dilution

Capital raising, especially on the unsponsored debt side, is not an easy road to navigate and can be risky. For this reason, investment bankers usually recommend funding acquisition growth runs with some amount of equity to unlock mezzanine financing more easily. However, this approach is not always needed especially with high quality, self-directed platforms with compelling acquisition formulas.

When founder rollover equity is present and acquisition purchase multiples are between 3 to 5, most acquisition roll-ups can be 100% funded with mezzanine financing, at slightly higher rates, but rates are still far less expensive than taking equity. Many mezzanine financing funds are actually equity investors at heart and want to play the financier role to emerging industrialists seeking to consolidate industries.

Mezzanine Financing Rewards Sophisticated Acquisition Platforms

This approach does not work with all acquirers as mezzanine financing providers are highly specialized in their taste. Platforms have to be well organized, highly systematized and well stocked with talent. Acquisition strategy and integration ability must be highly refined and experienced.

This type of 100% debt financing approach is not easy to do and there are points along the way where it seems insurmountable. However, we have worked with many founders who have experienced explosive growth from less than $1 million in EBITDA to over $15 million and even $30 million of EBITDA through 100% mezzanine financing.

Rather than sell equity when they were small and losing control of their business, they opted for mezzanine financing capital to drive huge acquisition growth and equity value. It’s a really smart trade and one that is widely available to enterprising founders!