Mergers and acquisitions have really heated up recently. Many middle market companies are quickly turning to M&A to expand their company and increase their organic growth. This is a by-product of the low growth economy, where fast growth is not available for most mature, middle market companies. When finalizing a merger or acquisition, it can be challenging to complete a deal without the required funding. There are several lending options a company can utilize:
Asset-Based Financing: These loans are secured by assets held by the company, such as accounts receivable, inventory, machinery, or equipment. This is beneficial for companies with strong balance sheets. There is an abundance of prime and sub prime lenders in this market broken down by loan size. Banks as well as finance companies provide these and the size of the loan is determined by assessing the liquidation value of the collateral.
Senior cash flow debt: Senior cash flow debt, or bank debt, focuses on the purchaser’s future cash flows. It depends greatly on the company’s predictions and ability to perform in the future. This is useful for businesses with a healthy upcoming of cash generation. Banks are usually limited to how much cash flow loan they can provide, as they still need underlying hard collateral as security.
Mezzanine Financing: Mezzanine loans are cash flow based, rather than asset based. They are highly structured loans that are essentially a form of inexpensive equity investment. These lenders focus on ensuring the company is generating enough cash flow to pay back the principal. Mezzanine loans are a great catalyst for a company seeking to realize long-term growth potential. Companies that can use the money to generate high returns are the best candidates for mezzanine financing.
Unitranche debt: Unitranche debt is used when senior debt does not provide the appropriate amount of leverage required to complete the transaction. Unitranche debt combines features of both mezzanine debt and senior debt, in one debt facility. It provides a one stop shop for a company in need of funding.
Growth Equity or Private Equity: Growth equity is a form of venture capital for cash flow positive companies where high growth is available. These investors tend to be technology industry focused and are seeking unicorn type companies that have historically grown their revenue at over a 100% growth rate. Private equity can be effectively used for M&A but it is very expensive and they will want control of the company.