The Peak Sensation with Mezzanine Debt

Posted on: October 23rd, 2023


Entrepreneurial success often results from taking a non-obvious path and repurposing resources to transform a business. Funding provided by banks and investors as opposed to mezzanine debt lenders is traditionally used to fund this growth journey. Mezzanine debt can also be repurposed as equity to transform the capital plan. As long as a company fits the lending criteria on an adjusted EBITDA basis, mezzanine debt will frequently provide all of the financing needed.

Sponsors with a good purchase price, a solid equity contribution of their own in the form of existing equity in their business or cash, will benefit from the minimal dilution of a mezzanine debt structure. With all in mezzanine rates of approximately 15% vs 20+% for equity, buyers will keep more of their value. In addition, mezzanine debt is eminently scalable and can be borrowed over several years through an acquisition financing facility. Mezzanine debt brings the peak sensation when it not only lowers the cost of capital but also accelerates the growth speed of the business. Using it to acquire small tuck in acquisitions is a great way to add more profit but also more growth optionality. Tuck-in acquisitions help a business gain speed and market entry particularly in building a distribution channel.

Small account acquisitions bring immediate EBITDA as well as the optionality of new product growth, giving the buyer significant bang for the buck. A strong ROI results from the flywheel effect of positive interplay between acquired accounts and new product sales to these acquired customers. It is as if each acquisition has a free option value embedded in its customer base that the buyer can activate. Mezzanine debt also has this free option value embedded in its DNA that facilitates accelerated growth when properly activated. It obviates the need for expensive third-party equity investment, can fill the entire capital need, and can be accessed in a fluid and continuous manner sustaining the growth course for years.