The right capital to use, whether debt, equity or mezzanine debt is not an easy question to answer when deciding your acquisition financing. People usually default to market conventions such as 30% equity and 70% debt. Sometimes they may try an equity light approach, using a thin slice of equity burdened by a big wedge of debt. These decisions require deep thinking to analyze the underlying risk to the acquisition and the future growth of the company.
Raising acquisition financing can be bewildering for first timers. Acquisition financing providers are hard to identify in numbers sufficient to yield enough strong prospects. First time companies are not well versed in the presentation standards and process requirements. Like any complex process, it is a journey with different stages that requires the right combination of people, process and commitment.
To the uninitiated, mezzanine financing appears risky, and certainly riskier than a simple bank loan. Given its higher interest rate and larger loan amount, most founders tend to avoid it due to fear of overleveraging. If a company is not used to operating with debt, it does take some adjusting to as mezzanine lenders are more focused on current and future financial performance than most banks are.
Business owners are successful when they control their own fate. Most founders with 100% ownership struggle to fathom not having complete control. Acquisition financing complicates the matter of control, making it highly dependent on the type of acquisition financing structure being used. Equity firms will certainly provide acquisition financing, but they will take either minority or majority control.
While there is brisk demand for acquisition financing in the market, often users underappreciate its significance in powering growth. Acquisition financing lenders underwrite to the future cash flow growth of a business making an acquisition. They lend into an evolving and unpredictable period where change management and new processes are the norm.