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Mezzanine Funding
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Mezzanine debt is a power booster for buyers flexing in a negotiation. The mere existence of mezzanine debt or any form of acquisition unitranche facility brings a level of respect from the sell-side broker and the seller. It brings psychological comfort to the sell side broker that they are dealing with a sophisticated, finance-supported buyer, and not some fly by night person in their basement with no real capital.
When you have mezzanine debt you are viewed as a very serious as a buyer. Your business has been scrutinized by smart and diligent people, and you have been deemed to be finance-worthy.
When you have your mezzanine debt lined up before you engage with the seller, you can transact faster and stand behind your letter of intent without having to go out and find an investor to provide the financing. Smart buyers flex their capital power from mezzanine debt by monetizing their ability to close to get a better deal and a lower purchase price.
Rather than offer a financing contingency, the buyer can list their lender as their capital source and harp on the size of the lender’s assets under management. The seller derives comfort from knowing the buyer has a billion-dollar fund behind them with the necessary deal closing machinery.
Mezzanine Debt as Negotiation Leverage
Mezzanine debt is the upper band of elasticity in a loan structure and can stretch further than any other lender. Many buyers have it lined up in advance to use in a last round of negotiations to fill any gaps between the asking price and funding sources. It is particularly valuable as a way to trade against a seller note or rollover equity on a discounted basis in the final round of negotiations.
If a seller is going to hold a $10 million seller note, the buyer can raise $5 million of mezzanine debt and propose the seller take the $5 million in cash in exchange for the $10 million seller note. This maneuver reduces the purchase price $5 million, by substituting 50 cents of cash for every dollar of seller’s note.
While seller notes are great to extract from the seller, sometimes the seller is cash hungry and only values the consideration they receive at closing, thereby diminishing the value of a seller note based offer. Mezzanine debt allows you to pay cash, lower the purchase price and close quickly, bringing a trifecta of value to the buyer.
