Mezzanine financing.

Mezzanine financing is subordinated capital that sits between senior debt and equity. It funds acquisitions, buyouts, and growth when senior lenders alone will not carry the plan, and it costs more than debt because it takes more risk while still being cheaper than selling equity.

How the process runs

1. Model and materials. A 3 year model and an institutional memorandum, because mezzanine is a story told in numbers.
2. Process. Matched mezzanine funds and BDC lenders approached in a managed, competing process.
3. Terms and diligence. Term sheets compared on cash coupon, deferred interest, equity features, and covenants; diligence commonly runs 30 to 60 days to close.

Typical terms in the market

All in returns to the lender commonly run in the low to high teens, structured as a cash coupon plus deferred interest that accrues, sometimes with warrants. Terms commonly run 5 to 7 years, interest only, sitting behind the senior facility by agreement. Mezzanine is generally an instrument for businesses with roughly $2,000,000 or more in reliable EBITDA.

Documents you will need

1. 3 years of financial statements and tax returns.
2. A defensible 3 year projection model.
3. Capitalization table and organizational documents.
4. Details of the senior facility and the transaction being funded.

What mezzanine lenders look for

Quality and durability of EBITDA, total leverage through their layer, commonly in the range of 3.5 to 4.5 times, enterprise value cushion beneath them, and a management team they would back through a bad year. They are underwriting the business's ability to be worth more, not just to pay.