Capital Options - Mezzanine Debt Lenders

Established franchisees have seen financing and capitalization alternatives blossom during the past few years. Traditional capital using straight senior financing and embedded equity or external equity capital has evolved to become only one of many alternatives for companies looking to grow.

But it's important for franchisees to have a firm understanding of their business's goals and growth strategies, including generic growth plans, remodeling projects (required and elective), and opportunities to expand through acquisitions, says Carty Davis, a boutique investment bank partner who has completed hundreds of transactions in the multi-unit franchise and restaurant space.

He recently wrote about the importance of understanding the differences between the various types of lenders and capital providers and how to pinpoint the ones that might work best. Here's what he says about one type of capital provider:

• Mezzanine debt lenders can fill a gap if there is a difference between the level of equity and the level of debt a senior lender is willing to advance. Typically, mezzanine lenders have a minimum loan requirement of $10 million and expect a low to mid-double-digit return. Warrants are also sometimes included. Mezzanine facilities have become less relevant as unitranche lenders can typically provide a less expensive and simpler alternative by combining senior and mezzanine facilities.