Fast Paced Acquisitions and Mezzanine Debt

Posted on: September 15th, 2020

Fast Paced Acquisitions and Mezzanine DebtMany roll up entrepreneurs see the need for acquisition speed. Most banks shun deals with rapid fire acquisitions, as it involves way too much execution risk and leaps of faith as to management’s plan. One acquisition itself is a complex project as it involves organizational change and brings new ways of doing things. Often there is resistance to the establishment of new processes and new strategic goals.

Most well-run companies have good cultures that employees buy into. When ownership changes, the culture can often change for the worse, causing employee dissatisfaction.

So while the textbook case of a roll-up is very appealing on paper and in business school classes for obvious reasons – greater scale, centralization of back office, greater efficiency, the ability to execute is very much dependent on the skill and expertise of the acquiror.

Roll up entrepreneurs also need scalable lending facilities that give them capital for multiple acquisitions. As the company grows, debt capacity expands.

The ability to tap this larger debt capacity over a series of deals is very important for the success of the roll-up as it takes too long and is too expensive to have to replace your lender for every new deal.

The question is how quick to pace the acquisitions and often, acquirers pick a level that is unsustainably fast.

Mezzanine Debt Lenders and Acquisitions

Mezzanine debt lenders can support fast paced acquisitions, but they need to see a track record of successful assimilation before they will fund subsequent deals.

Most deals take at least two quarters to integrate, and then it takes another quarter or two to see the results of the integration show up in the financial statements.

Without being able to see the financial results of the acquisition, it is challenging for mezzanine debt lenders to enthusiastically support the next deal.

Once you have completed the integration, and can show strong profit growth, you can then move on to your next deal.

The pace of acquisition should not be geared to the size of the acquisition pipeline or how quickly you can close. It should be geared to how quickly you can operationalize the acquisitions and show the results.

Mezzanine debt lenders are very interested in supporting your roll up with capital to increase the scale and value of your company.

However, they will not take on excessive integration risk borne by an overly fast paced roll up plan.

The top 4 reasons why mezzanine debt lenders avoid fast paced acquisition roll-ups are:

  1. Lack of operator experience with multiple acquisitions – mezzanine debt lenders back only highly experienced and previously successful operators. First time operators with big roll up speed goals usually are usually a bit green and struggle with all the unknown operational issues.
  2. Time Delays – usually acquisition integration gets delayed for unforeseen reasons. It usually takes twice as long and several corrective steps to get things on track. Mezzanine debt lenders understand this and will provide support to get through this, but they do not want you to quickly rev up the acquisition engines after a hairy integration experience.
  3. Acquisition indigestion – fast acquisitions creates a backlog of integration issues which can affect the normal functioning of a company and slow down important day to day processes.
  4. Fast speed increases overall enterprise risk – building a great company does not happen on the fly but over a long period through the recruitment and cultivation of talent.Fast acquisitions usually have a lot of turnover which negatively affects the talent level of the company and can pose risk to customer relationships.