Posted on: March 23rd, 2023
During strategic roll-ups, unusual events unfold that deviate from the original plan. A lot of the ultimate success of the rollup depends on how these events are perceived by the mezzanine debt lender. If the borrower manages the presentation of these surprises in a transparent and upfront manner, it helps the mezzanine debt lender build confidence. If these events come across as random, deus ex machina- type events occurring in uncontrolled fashion, the mezzanine debt lender expects more negative surprises in the future.
As in most things in life, how these surprises are contextually framed and communicated is of paramount importance. Most smart mezzanine debt lenders expect surprises post-closing as they do not expect their borrowers to be omniscient. They know markets change, employees leave and customers sometime leave as well. These are immutable laws of middle market companies following a major acquisition or sale of the company. These very dynamics are the risk factors that mezzanine debt lenders get paid to bear as part of their risk assumption in the transaction.
Seasoned mezzanine debt lenders look to back companies with highly experienced managers who are well versed in managing in unpredictable environments with a high degree of change. Most initial post-closing surprises are caused by something outside of the company’s control. While even the best management teams cannot control what goes on in the external environment, they absolutely do control how they engage with these events once they become problems. Management is 100% responsible for how they react including their speed, forcefulness, and sustainability of follow-up.
A quick response reaction shows they have a high level of situational awareness of the business. A forceful response shows they can gauge big problems quickly and act with intensity. Good management teams react intelligently to events and convey their operational engagement in a transparent light to their mezzanine debt lender. While the lender may not be happy with the company’s problem, they will continue to have faith in the management team, as long as they feel plugged into what is going on and where it is heading.