Creative Acquisition Structures: How Mezzanine Debt Fits the Puzzle

Posted on: September 25th, 2025

Creative Acquisition Structures: How Mezzanine Debt Solves Funding Gaps

There are a number of ways to solve the funding puzzle at closing in the world of acquisitions. Mezzanine debt has unique properties that give it puzzle funding superpowers compared to other forms of capital. Most deals try to stretch bank financing as far as they can, only for it to come up short due to collateral shortfalls. By the time the bank is done trimming their loan amount, an unfunded gap emerges. This usually happens at a time when there is an increased need for funding due to price revisions, growth investments or extra transaction costs. This upward revision is particularly challenging with founder-owned companies that lack a large fund of equity capital.

How Mezzanine Debt Fills the Gap

Mezzanine debt funds off a fixed multiple of a company’s EBITDA on a current basis. This means the mezzanine debt lender can factor in strong current financial performance when sizing the loan, providing extra room to fund the gap. The multiple approach is amplified by the current earnings growth to provide a larger loan that plugs the funding gap.

Superior Thinking: Balancing Risk and Return

An additional way that mezzanine debt fits the puzzle is through its superior thinking which balances upside return with downside risk. When considering an acquisition, buyers need to think of both the upside and downside because the risk of overpaying or underperforming is very real. Mezzanine debt lenders are big thinkers and have a strong sense of how much to pay and how best to project. Their judgement is incredibly valuable to buyers who are going through an acquisition for the first time.

Scalable Funding Through Delayed Draw Loans

Finally, Mezzanine debt lenders can provide all of the funding needed and also additional funding through delayed draw loans. Having one lender is much more efficient for certain deals than having multiple lenders, even if the financing is more expensive. A scalable mezzanine debt loan that can be used for multiple add-on acquisitions provides significant value to a company on the move.

Investors like their returns and keep their cards close to their vest when disclosing acquisition finance strategies. Equity investors with large funds like to create the impression that they will put all the money into the deal, especially an acquisition finance type deal. If you need $50 million in acquisition finance, and your bank suddenly has short arms, founder owned companies often turn to equity investors to bridge the gap between the bank and the full capital need.

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.