In a world of easy money availability with brokers pitching surefire financing approaches, mezzanine debt gets lost in the shuffle at times. Most brokers and investment bankers do not really understand mezzanine debt, fewer still have ever been in the mezzanine finance industry. Most business owners have heard of it, through an advisor or through their banker, but they still need more information to understand how it can work for them.
There is an enormous pay off for business owners who learn about mezzanine debt. Why you may inquire? Because a business owner can use it to fund rapid growth or a large acquisition, without diluting their ownership stake. Wait a second, you ask. Only equity investors can do that, right? Most owners think that the only way to really grow large through closing an acquisition is via an equity investor. This is simply not true as evidenced by the thousands of companies that have closed acquisitions with only mezzanine debt as the sole funding source. True, the mezzanine debt providers in the US typically fund into other investor's deals where a private equity group is purchasing all of the shares in a company.
However, many mezz debt providers purposefully seek direct lending opportunities with companies that have a need for funding. In these types of deals, the business owner has a direct relationship with the mezzanine lender. They do not own shares but have a way to get upside return through a warrant agreement based on the future value of company. There are other great things to know about mezzanine debt, that can help boost the value of your company.
1. Mezzanine debt, if structured properly, can provide 100% of the funding needed for an acquisition or buyout.
2. The key to a proper structure lies in the strategic and financial presentation of the business to the mezzanine community.
3. It views creditworthiness through the stability of the company's cash flow over time.
4. The mezzanine loan amount is viewed as a multiple of your Company's EBITDA. The lower the multiple, the better. The higher the multiple, the more risk they see.
5. Mezzanine lenders are first and foremost lenders, who are concerned with getting back their principal loan balance. They make their return primarily through interest rates and secondarily through upside on their warrants.
6. Mezzanine debt is almost always unsecured by assets and does not have collateral to protect the value of their loan. They are usually in the second position beneath the bank in the company's capital structure.
7. Their loan is dependent on the cash flow of the business so they are partial to stable, non cyclical companies.
8. It has a long term focus. Their money should be used to build up the profit of the business over the first two to three years. If the borrower does this successfully, the borrower will be able to repay the loan or refinance the loan easily.
9. Mezzanine debt providers are very dependent on the management of their borrower companies, and are not interested in dislodging management. They see themselves as patient investors who will work with the management team to get through any challenging times. These loans are long term often with 5 to 7 year maturity dates.
10. Mezzanine debt does not require a personal guarantee from the business owner. The interest rate they charge provides the mezzanine debt provider a sufficient return for the risk of the loan.
Attract Capital is a financial advisory firm dedicated to the growth of mid-sized companies throughout the United States and Europe.
There is an enormous pay off for business owners who learn about mezzanine debt. Why you may inquire? Because a business owner can use it to fund rapid growth or a large acquisition, without diluting their ownership stake. Wait a second, you ask. Only equity investors can do that, right? Most owners think that the only way to really grow large through closing an acquisition is via an equity investor. This is simply not true as evidenced by the thousands of companies that have closed acquisitions with only mezzanine debt as the sole funding source. True, the mezzanine debt providers in the US typically fund into other investor's deals where a private equity group is purchasing all of the shares in a company.
1. Mezzanine debt, if structured properly, can provide 100% of the funding needed for an acquisition or buyout.
2. The key to a proper structure lies in the strategic and financial presentation of the business to the mezzanine community.
3. It views creditworthiness through the stability of the company's cash flow over time.
4. The mezzanine loan amount is viewed as a multiple of your Company's EBITDA. The lower the multiple, the better. The higher the multiple, the more risk they see.
5. Mezzanine lenders are first and foremost lenders, who are concerned with getting back their principal loan balance. They make their return primarily through interest rates and secondarily through upside on their warrants.
6. Mezzanine debt is almost always unsecured by assets and does not have collateral to protect the value of their loan. They are usually in the second position beneath the bank in the company's capital structure.
7. Their loan is dependent on the cash flow of the business so they are partial to stable, non cyclical companies.
8. It has a long term focus. Their money should be used to build up the profit of the business over the first two to three years. If the borrower does this successfully, the borrower will be able to repay the loan or refinance the loan easily.
9. Mezzanine debt providers are very dependent on the management of their borrower companies, and are not interested in dislodging management. They see themselves as patient investors who will work with the management team to get through any challenging times. These loans are long term often with 5 to 7 year maturity dates.
Attract Capital is a financial advisory firm dedicated to the growth of mid-sized companies throughout the United States and Europe.
Built upon a foundation of corporate finance expertise, practical experience and legendary customer service, Attract Capital's consulting services and solutions are aimed at increasing the efficiency of capital raising for mid-sized companies. The firm offers Mezzanine Debt Solutions, Acquisition Financing, Business Consulting Services, Growth Capital Funding and Acquisition Search Services to name a few.
For more information, please visit http://www.AttractCapital.com
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