Posted on: April 19th, 2022
Mezzanine debt lenders provide funding for scale-up scenarios where growth rate acceleration can be realized. These scale ups include acquisition driven strategies as well as new product or new market development. Scaling companies are not interested in single digit revenue growth but step change growth which transforms not only the size but also the diversification of the enterprise. This transformative growth is a historic step and requires topflight C-level management talent for leadership.
Mezzanine debt lenders have experience funding scale-up transactions and are keenly focused on the quality and depth of the team. Mezzanine debt lenders focus on the level of integration risk of the scale-up which relates to management’s ability to integrate the acquired operation into the existing business. On paper, business integration is a straightforward exercise with similar workflows at a higher level of volume.
Mezzanine Debt Lenders in Business Integration
In reality, business integration unfolds in a mercurial fashion, with many unknown issues undermining forward progress. Going into the acquisition integration, there is a known scope of key areas to address. Often unknown issues, such as non-standard business practices within the current workflows, make the operational assimilation longer and more resource intensive. Mezzanine debt lenders are a key stakeholder in the integration outcome as their loan repayment relies on the Company significantly scaling its cash flow.
Without higher cash flow materializing in year 3 or 4, the mezzanine debt repayment outlook is dim at the end of 5 years. Given the importance of this factor to cash flow and valuation formation, it is critical to ensure you have veteran and highly skilled leadership at the helm of your scale up. Experience is a great teacher in corporate growth, as often the best laid plans often go astray, and quick pivoting is the best way forward. Mezzanine debt lenders will assess your management team in light of their historical accomplishments. Ultimately, they will choose to lend to companies with skilled and senior leadership who can not only integrate efficiently but also create systems and processes to support higher levels of corporate growth.