Business Size and Scope for Mezzanine Debt

Posted on: April 7th, 2021

mezzanine debt

Mezzanine debt is a word most business people know nothing about until they need it. A banker or lawyer may suggest it based on a vague understanding. It is used infrequently and usually in acquisitions, which is not a common corporate event.

The industry associations that feature mezzanine debt tend to be more institutionally focused and rarely publish information helpful to a neophyte acquirer who thinks he or she needs mezzanine debt to fund their deal. The concept of mezzanine debt, that is of cash flow based structured lending, can be applied to any acquisition and is a favored form of closing a deal.

Focus of Mezzanine Debt Lenders

Mezzanine debt lenders, however, focus on businesses of a certain size and certain regional scope. The small business market, generally considered under $10 million in sales, is perceived by lenders as too risky for a cash flow-based lending approach. Although there are exceptions, most mezzanine lenders pass on these small businesses and prefer to lend to companies with revenue ranging from $10 million+. There are many reasons for this size focus – the size of the fund, the perceived credit risk, the lack of management team breadth, among others.

Mezzanine debt lenders are always seeking companies that albeit modest in revenue size (say $20 million), are strong in systems, processes, and management sophistication. Along the lifecycle of company, a business changes its focus from a lifestyle income producing vehicle to a long-term value creating, growth platform. When a company becomes a growth platform, they usually start investing in better financial reporting, better internal ERP, and more management structure. These investments allow the company to scale at a faster rate and to expand their scope.

Often this scope expansion includes new geographies, new sales channels, and new products. It is through this scope expansion that a small business takes a big step forward and adds greater strategic mass and diversification. If your business is investing in this area and preparing for this type of growth, then you will be well positioned for mezzanine debt at the appropriate time.