Mezzanine financing is used for many things – accelerated organic growth, sale of a company or partner buy-out. Often, the timing of a mezzanine financing is synced up with one of these major corporate events. However, mezzanine financing is extremely effective when used as the opening act to a strategic acquisition or a series of acquisitions.

When a company raises mezzanine financing and then subsequently executes an acquisition, it benefits on a number of fronts. First off, sellers prefer to transact with buyers that have cash in hand. Many business purchasers have to raise financing prior to closing the acquisition which adds risk to the deal for the seller. Many deals do not get closed because the buyer is unsuccessful in raising financing.

Having first raised mezzanine financing allows the buyer to position it as a preferred buyer which can often result in a better price and better terms. Sellers are more apt to give a better price to a buyer with cash to close than a buyer who needs to bring in capital. Secondly, an acquisition process and due diligence process is long and intense. It often absorbs many of the resources of the acquiring company.

If mezzanine financing has already been raised, the buyer has more resources to focus on the acquisition due diligence. If both financing and due diligence processes are going on simultaneously, this taxes the resources of the company and can result in a sub-optimal due diligence process. Thirdly, many mezzanine financing providers require review of the acquisition prior to giving their consent. They will review the financial statements and test the acquisition premise on the part of the acquiring company. Often this review helps the acquiring company avoid a misstep or negotiate a better valuation. Finally, having your mezzanine financing in the bank helps you move along the acquisition process at a faster rate.