Can mezzanine financing be used to buy a business?

Mezzanine financing can be one layer in funding a business purchase, alongside the buyer’s cash and a senior loan. BDC says acquisition financing may include a business purchase loan, cash flow financing or mezzanine financing, depending on the size and structure of the transaction, and that its Growth and Transition Capital group offers customized financing for certain acquisition projects. Whether it suits your deal is a question for the lenders involved.

How it fits behind a senior lender

Under Ontario’s Personal Property Security Act, where no other provision applies, lenders whose security over the same assets is perfected by registration rank by the order of registration. The Act also lets a secured party subordinate its security interest to another’s, and the subordination is effective according to its terms. In practice the ranking between a senior and a mezzanine lender is something they agree before the loans close, so each needs to see the other’s requirements early.

How a program loan limits the room

The Canada Small Business Financing Program guidelines require a program loan that finances real property or equipment to be secured by a valid first charge on the assets financed, and where an earlier general security covers those assets, the lender must obtain postponements of rank. The vendor-financed part of a price is not eligible for a program loan. If a program loan is your senior layer, any lender behind it must accept a lower ranking.

Questions to put to the lender

• Which assets would the mezzanine lender expect to hold security over, and does that fit the senior lender’s terms?
• Does the term sheet include anything beyond interest, and when does repayment start?
• Who must agree to the ranking between the two lenders, and by what point before closing?