Financing an LBO with 95% Mezzanine Finance Structure?

There's so many variables... You do know the differences between mezz vs. bank loans right?

What is it's CF like? Why would you want to burn through it's cash balance? What would the pricing look like on the debt?

Pretty sure that if KKR can't get 19:1 leverage on its buyouts, you won't be able to, either....

BobShark:

I'm a "chimp", so consider me completely uneducated on the topic. Either case, I found a company that seems to have a lot of cash/equivalents and assets sitting on its books (approx ~3M cash, assets ~$1.5M, $1M in long term accounts receivable),With liabilities at ~2M. It is private, but I would love to make a bid on the company $6M. (I know the industry pretty well).

I am no genius, but taking this company over and paying back the debit with internal cash would seem like a great idea. The problem is I have no idea how to approach the financial side of such a transaction. Who exactly should I seek out? Though I live a great life, my wealth has yet to provide me the comforts of purchasing equity at such large values.

A mezzanine loan would seem like my first bet, maybe put in %5 on my own money and leverage the 95%, then "re-finance" that instrument with a senior debt instrument?

You don't get the cash. The sale would be on a cash free, debt free basis as another poster said. The old capital structure gets blown out and replaced by your new one.

Nobody on earth is going to let you leverage that high, as another poster said. Doing all mezz is stupid because it's so expensive. Generally what you would need to do is a combination of senior and subordinated, but the bank will have covenants on the company's total leverage in your term loan contract, meaning you probably won't be able to get even near the amount of money you would need in debt.

The only other option is a seller note, and that still is completely unrealistic as you're asking the seller to sell the company for 5% of the value in cash and the rest in an interest-bearing note. The risk is way higher than the prospective return, even at higher interest rates. Also, the seller is getting out because they want liquidity most likely, and the seller note defeats that purpose.

Just face the fact that you don't have the money. You don't have enough equity to contribute on your own, and the company can't sustain the debt load required for you to finance the purchase at your level of equity contribution. What you need is an equity partner, which will take a majority ownership position in the company, with your equity having a minority ownership stake.

Think of it this way: Why would they ever loan you 95% of the purchase price when they could contribute that extra 5% themselves and own 100% of the company's equity themselves? Their risk would be nearly identical but they'd have 100% of the upside. No bank is ever going to do this. At a minimum, many banks require at least a 65/35 debt/equity split. Probably more so for deals of this size, although I'm not certain.