The Five Top Reasons why Mezzanine Loans are a good option for Acquisition Financing

Posted on: September 19th, 2018

mezzanine loan for acquisitionWhen buying a company, you need a loan that will work for you and fit your need.  Too often, loans are rigid and ill-fitted to serve as a reliable form of acquisition financing.

Just because a lender wants to give you a loan, does not mean it is the best loan for you or that it is a loan worth taking.  Finding the right loan to be your acquisition financing takes work and expert knowledge.

These loans are not the type you see advertised on TV or even the ones that are available on the internet. Those loans are cookie cutter jobs where they can take a quick application from you and have you approved in hours.

Acquisition loans are an entirely different matter because they support important strategies that underpin your long term growth. Good acquisition loans can fund into the future growth of your business.

The decision to lend is based solely on the future earnings power of your business.  They don’t think about asset collateral or personal guarantees.

They focus on the level of EBITDA your business can produce.   Whereas banks look back at history, good acquisition lenders look forward and underwrite to what you can do with the business once you own it.

They base their lending decision not on what the business did historically, but on what you think you can do with it on a pro forma basis.  This opens up all sorts of opportunity for you as the borrower, such as a larger loan, a longer term and more liberal repayment schedule.

When lining up acquisition financing, you want as large a loan and as long a repayment period as possible.  All acquisitive companies benefit from having more time, capital and space to grow.

Companies looking to do multiple acquisitions or roll-ups should be very careful about loan size and term.  Roll-ups are difficult operational journeys and usually require more time and money.

When surveying the options available in the market, mezzanine loans stand out as a particularly good option for acquisition financing.  Here are the 5 top reasons why mezzanine loans are a good option for acquisition financing.

  1. Best Capital Size – Mezzanine loans are sized according to a multiple of adjusted EBITDA. The multiple can range from 3.0 times all the way to 4.5 times.  This gives a growing company much needed capital, extending their growth runway and allowing them to advance at a faster speed.
  2. Custom loan structure – Mezzanine loans are highly tailored to the cash flow projections of the borrower. Mezzanine loan facilities give you capital when needed, and allow you to repay the loan when cash flow is strong.
  3. Best Maturity Date – Mezzanine loans mature in 5 to 7 years and do not require any principal to repaid for at least 3 years. Many loans do not require any principal to be repaid until the maturity date. This long term, patient tenor is helpful for growing companies who realize their cash need is greater than what they projected.
  4. High level understanding of your business –Mezzanine lenders are at the top of the lending food chain in terms of business smarts. They will ask a lot of questions but ultimately will have a comprehensive grasp on how your business makes money. This is very important if you ever run into a downturn.
  5. They do not require a lot of equity or a PG– All mezzanine lenders want to see you invest some dollars in the deal, but they can be lenient if you have existing value in your business or you get the seller to rollover something.