Become a Middle Market Champion through a Mezzanine Lender

Posted on: June 30th, 2017

Most middle market companies continually invest in their businesses as they strive for greatness. This can be expanding their talent, expanding their market reach and positioning themselves for a big growth spurt.

They often exist in a transitional state where there is always something worthwhile to invest in, but never enough cash to go around. These companies decided at some point to scale their business and go from a $5 million revenue lifestyle company to a $50 million middle market company.

The journey from lifestyle to middle market can be a precarious one, as growth often unfolds in a non-linear and unpredictable way. Different leadership and management skills are needed.

The growth journey also requires more capital than you may think due to lags that often occur between budgeted performance and actual results. Having extra liquidity on hand is a smart way to insure you can fund your transition.

Companies often excel and become champions when they have a smart lender on their side who can fund this growth journey, with a solid understanding of the big picture. Mezzanine lenders are smart lenders and great partners for middle market companies.

They facilitate these growth transitions in five important ways:

They understand what drives the business – unlike bankers who focus often on asset values, mezzanine lenders take the time to learn your business. They ask good questions and make sure they’ve done their homework on what drives your cash flow. This gives them a stronger knowledge base to rely on during the lending relationship.
They give you more money than a bank – Mezzanine lenders base the size of their loans on your EBITDA and give you a multiple on your EBITDA. This usually gives you much more funding than what you can get from a bank.
They rely on growth and management – Mezzanine lenders are able to discern good management teams. They are also able to identify companies with strong positions in good markets. This gives them comfort and enables them to continue to believe in the long term viability of a business, even when it may be under short term stress.
They are patient and long term – unlike banks and other short term lenders, mezzanine lenders have at least a 5 year term window. They are able to make decisions taking a long term view. As long as the business is performing relatively well and they are getting their interest, they are likely to be supportive.
They are flexible and scalable – Mezzanine lenders will flex to fit the structure you need. And they will continue to give you money as you need it, as your growth transition dictates. They can scale with you and meet your capital need throughout your growth life cycle.

While mezzanine lenders cost more than a bank, you get so much more in return. With a mezzanine loan, your company can fund it full growth transition and have a strong chance of becoming that middle market champion it is destined to become.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.