Fund your Growth Roll-Up with Mezzanine Debt

Posted on: February 17th, 2020

Growth businesses usually pursue a variety of different avenues of growth in their bid to diversify and expand their customer base. Some pursue organic growth while others pursue acquisitions. Organic growth can take the form of regional expansion or new product development. Smart companies combine both approaches in a Growth Roll-up strategy.

Growth roll-ups bring tremendous optionality to strategic growth and solve internal resource bottleneck issues. In the traditional Growth Roll-up strategy, a company make acquisitions to expand regionally and acquire more customers. It simultaneously ramps up innovation and R&D to create and sell new products across this wider customer channel.

Mezzanine Debt covers both acquisition and growth

The combination of a wider customer channel and new innovative products is highly synergistic and can catapult the growth trajectory. Growth Roll-ups are especially tailor made for technology companies with market leading, next generation products who lack the ability to cultivate a customer channel through direct sales.

Acquiring companies for their customer accounts and overlaying next generation products, is a low risk, high value form of business development. These are best executed when funded with low cost, long term flexible forms of capital such as mezzanine debt. Mezzanine debt is the best way to fund growth roll-ups as it provides nearly all the acquisition capital and growth capital needed.

Upsizing your Mezzanine Debt

Mezzanine debt takes a real time, dynamic view of your cash flow and the cash flow of the to be acquired company. This includes pro forma consideration of your combined company EBITDA, including addbacks for your one-time expenses as well as future addbacks from the combination of the two businesses. This gives you a larger EBITDA than your actual historical EBITDA when calculating the amount of mezzanine debt, you qualify for.

Furthermore, the acquisition is a fulcrum that unlocks the ability to upsize the mezzanine debt raise. Because you get 100% credit in your mezzanine debt amount for the trailing twelve-month pro forma EBITDA, you can raise a larger loan and use it to fund organic growth. Essentially, through buying another business and increasing your combined cash flow, you can raise a larger mezzanine debt loan and use the proceeds to finance both the purchase as well as the organic growth. This approach works if the mezzanine debt lender sees existing equity value in your business or if you are providing cash equity at closing.

The Value of Mezzanine Debt’s extra debt capacity

Mezzanine debt offers the most generous debt capacity than any other type of loan in the market. In some instances, mezzanine debt can match the level of funding you would receive from a combination senior debt and equity investment. The ability to lend more is the major defining feature of mezzanine debt. Through its use of flexible debt multiples and creative bespoke structures, mezzanine debt lenders can lend more, and by doing so, deliver more value to borrowers. Due to their flexible underwriting approach, they can visualize the growth plan and more precisely estimate the capital needed to successful complete it. Mezzanine debt is not constrained to a loan size by the level of collateral on the balance sheet. They respond to the credibility and persuasiveness of the growth plan and balance the need for extra capital with their appetite for risk.

More capital for the borrower means proper capitalization for the entirety of the growth program. A larger loan ensures ample capital for the purchase, growth, unexpected integration costs and increased working capital needs.