Any Tips on Standard Mezzanine Lender Terms for Search ?

February 27, 2024

by a searcher in New York, NY, USA

Can anyone speak to what "standard" terms are for a mezzanine lender to a search deal? I suspect that terms will vary deal to deal, but generalities here are welcome because there is a lack of even rough ideas on Searchfunder for mezz lending to searchers. Let's assume total enterprise value is between $5-10 million, multiple is 5x, and the check for the mezz lender is 2-3mm. Let's also assume SBA 7(a) debt is senior to the mezz.

If SBA interest rates are 10-11%, should I expect mezz to be 12-14%
What is normal minimum check size?
Is it standard to allow a PIK toggle?
What are standard amortization/maturity terms? Are balloon/bullet maturities normal?
Who is active in the mezz lending in the space?
Any other key terms we should keep in mind?

1 Like

6 Replies

117 Views

Replies

Reply by a searcher
from University of Richmond in New York, NY, USA

Depends on the deal, but at this size you should expect to pay 14-15% all in, which will likely be a mix of cash and PIK (usually 1-2% of the all-in interest cost). Minimum check size varies widely depending on the lender. Some can take down the entire check for a deal of that size, while others may club together with one or two like-minded mezz lenders (very popular in this space). We don’t typically ask for PIK toggles in our deals, but again depends on the lender and whether that's something you feel would be helpful if the business is cash constrained. 5/5.5/6 year bullet maturities are standard. There are a lot of active lenders in the space, you can start with the SBA’s SBIC directory and filter by Mezzanine and Hybrid Debt/Equity. I could potentially share some names over PM depending on the industry of you target. Also depends on the firm, but some will want to co-invest such that 25-50% of their total check is in equity. Happy to chat further if it would be helpful. https://www.sba.gov/funding-programs/investment-capital/sbic-directory

Reply by a professional
from Villanova University in West Chester, PA, USA

Hi ^redacted‌, I agree with the comments above. Interest rates depending on the lending environment, but 12-15% currently is about right. Minimum check size depends on the lender, and comments above re: the requirement to co-invest can be common. I don't see as much in terms of the PIK toggle, and most of what I see are interest only loans with balloon payments after 5-7 years. There are a lot of other components to think of with mezzanine lenders, but vary considerably from deal to deal and the overall sources of funding. I'd be happy to chat further. Feel free to DM me or you can schedule a complimentary consultation through the link in my bio.

+4 more replies.

Join the discussion