Working capital is the cog in the flywheel of daily business activity, converting orders into sales. While vital, it is underemphasized with most acquisition financing transactions. Rather than appreciating its importance to day-to-day operations, some buyers look at working capital as an asset to squeeze out extra acquisition financing to fund the purchase price.
Acquisition financing approval creates fist-pumping joy for most acquirers, who have worked hard to gain the confidence of the acquisition financing lender. Borrowers, due to the difficulty of diligence and the fog of questions, often conflate approval with 100% confidence.
Technical finance vocabulary tends to confuse and conflate terms that should be clearly understood. Acquisition financing and leveraged buyouts are two such terms. They both involve a financing transaction as well as an acquisition of something. They both involve large amounts of debt.
In acquisitions, deal structure is destiny and yet too many investment bankers underwhelm in structuring between mezzanine debt and minority equity. Investment bankers often overuse equity as their go to capital. In many cases, mezzanine debt can be used in the transaction structure creating huge cost savings for the issuer. Minority equity has its strong points as a patient and durable form of capital, but it is very expensive.
Mezzanine debt is a strong choice for first time buyers due to its balanced and patient approach.
As a hybrid type security, it embeds equity-like creativity into a conventional loan structure, providing more elasticity, customization and timespan.