Mezzanine financing preparations – first call with mezzanine lenders

Mezzanine financing preparations - first call with mezzanine lendersMezzanine financing preparations are a big deal, if you’re serious about this business. We probably don’t need to tell you that doing your homework before approaching mezzanine lenders is of HUGE importance.

Sure, you still need to meet the investment criteria of mezzanine funds to get the financing in the end. But without the right first impression you might not even get the chance to show the investors that you meet the criteria. Therefore, your preparation for the first call needs to be rock solid.

Below are the steps that you should follow to make sure that your preparations for the first conversation with mezzanine financing companies are up to speed with the expectations of these investors.

Identify your financing need

Focus on what matters most first. How much financing do you actually need?

This is going to be one of the key questions from the investors. In fact, you probably need to figure out which mezzanine firms to approach based on the amount of funding you are looking for. At the same time, you should have a clear picture from your own business viewpoint why the number you propose makes sense.

In almost all cases what is needed to furnish a good answer to this question is a financial model. The model (most likely you will be using Excel) should include your income statement, balance sheet and cash flow statement. Furthermore, typically the mezzanine financing companies expect monthly forecast and not just the year-end figures.

One note on the financial model is that it should be dynamic and clean. All the input parameters should be clearly marked and there should be no hard-coded numbers. In this way, the mezzanine investors can readily change the assumptions and see their impact on your projections.

Also, remember to include the financial statements from the last three years and the latest management accounts available. Ideally, the historical annual statements should be audited. The historical figures should form the foundation of your financial forecast. It is also a good idea to prepare for sharing the historical accounts as stand-alone documents.

Mezzanine financing model - key inputs and outputs

Another important point to keep in mind when preparing the financial model is that your forecasts should be achievable and realistic. Not only will the lenders conduct a due diligence to validate your projections, but they will also use them to measure your progress. Also, you don’t want to be changing your forecast midway through your funding process. This could undermine your credibility. Therefore, keep your projections reasonable.

Prepare your company presentation

mezzanine financing preparations - 10 slidesTypically, you will not be showing your company presentation while talking with the potential mezzanine lenders for the first time on the phone. Still, it is fairly common that they will ask you to send such presentation after the call. If this is not the case, then you will still show it during your next conference call or meeting. Therefore, you should have it ready.

The primary purpose of a company presentation is to stimulate interest and NOT to cover every aspect of your business and try to answer every possible question they might have in relation to the funding you are looking for. Your objective is to generate enough interest to get another conference call or a face-to-face meeting.

Thus, it is recommended to keep your presentation fairly short (up to about 10 slides). This impossibly low number forces you to focus on the absolute essentials. You can add a few more, but you should definitely avoid exceeding fifteen. Keeping in mind the primary purpose of the presentation, you don’t need to cover the details yet. There will be time for that later. Right now keep it short and to the point.

The key sections of your presentation will typically include:

  1. Title or cover slide
  2. Company background and history
  3. Business model
  4. Key competitive/strategic advantage(s)
  5. Sources of business stability and downside protection
  6. Market overview
  7. Management team
  8. Funding history & shareholders
  9. Current funding needs
  10. Long-term plans for the company

There is another post that goes into more details of what to include into the company presentation and why. Click here to access it.

Research the market and identify potential investors

Mezzanine financing market researchBefore talking to potential mezzanine investors, it is worthwhile to familiarize yourself with the industry as a whole. Of course, you will learn new things as you go through the process of arranging mezzanine financing, but starting on the right footing lets you progress faster and helps you to communicate better with the mezzanine firms.

Understand the key concepts and vocabulary

One of the first things that allow you to communicate better with the mezzanine lenders is to understand their language. Key concepts and vocabulary used in mezzanine financing setting are easy to grasp for anyone with corporate finance background or experience. Reading through GMF Blog might come in handy here.

Validate your idea for the transaction by identifying similar deals in the past

Another advantage of researching the industry is that you can find references to actual deals that were completed in the past and have some similar characteristics to what you are looking for. This can help on several fronts, such as

  • Broadening your understanding of different structures in which mezzanine financing is employed
  • Identifying potential mezzanine capital providers
  • Giving the reference points for the current and historical pricing for mezzanine capital

One of the ways to track news and get the roundup of recent mezzanine financing transactions is to sign up to GMF newsletter. Once a month, we send a very brief summary of the most recent news from the field. You can sign up by clicking here.

Two of the points above are discussed in slightly more detail under the next subheadings.

Get the understanding of typical terms offered by mezzanine funds

Before you go out and start asking for offers, it is a good idea to have an understanding of what typical terms mezzanine funds propose. This acts not only as a reality check for your own fundraising idea, but it also allows you to more efficiently evaluate the offers collected from the potential investors.

Some of the key terms include:

  • Amount of funding or size of the transaction ticket
  • Coupon or interest rate
  • Equity kicker and/or participation
  • Subordination to other funding instruments
  • Maturity or term of the loan
  • Repayment schedule or bullet
  • Board seat and access to information
  • Other fees

Many of the mezzanine firms are very upfront about providing information on their typical terms. You can find this information directly from their websites or, at the latest, they should indicate these during your first meeting. You can also find a lot of information on the investment criteria and financing terms in the profiles of mezzanine funds listed in Get Mezzanine Financing directory.

List the potential mezzanine capital providers

In order to be able to call mezzanine funds you first need to identify the firms you want to approach. It is not feasible to talk to every single mezzanine financing provider. At the same time, you can’t limit yourself to just one or two. You want to keep the initial contact list broad enough to ensure you get a good coverage of potential lenders. Keep in mind that not all might be the right fit for you in the end, thus you will probably not get the offers from all the firms you initially contact.

Collecting the list of feasible mezzanine financing providers typically starts from your own network. Bankers, accountants and law firms are the traditional sources of leads to mezzanine funds. You can also search for them directly on the internet. One resource that we’ve created at GMF is also very helpful in this process – list of mezzanine funds that is available on our website covers a big portion of the firms and it is regularly updated to give you the most relevant information.

Develop a plan for the remainder of the process

Mezzanine financing planMezzanine financing preparations don’t end here. What you still need to do before you pick up the phone and start calling mezzanine firms is to have a plan in mind of how you want to run the process all the way until closing. It will not only help you be more organized and show to the mezzanine investors that you are a professional, but it will also give you a competitive edge when negotiation terms of the financing.

The next step involves approaching lenders during a short interval of time to keep the process on similar stage with multiple firms. This will allow you to narrow down the potential capital providers more efficiently, as you get the offers around the same time. In this way you can compare and rank them more easily.

After you evaluate the initial offers and rank them according to your preferences you will likely end up with very few that you really want to move forward. Negotiate the term sheets with maximum 2-3 lenders to keep the workload manageable.

Typically, you will sign only one and move to due diligence phase. Once completed, you still need to finalize the legal documentation before you can close the transaction.


Exclusive bonus – Mezzanine financing pre-screening document checklist

Mezzanine financing - pre-screening document checklist cover
To further boost your mezzanine financing preparations for the first calls and meetings with the potential lenders we have prepared a bonus exclusively for the readers of this article. This document checklist allows you to laser focus your preparations before approaching potential mezzanine investors.

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