The Growth Capital Guide: Leveraging Mezzanine Financing for Growth

1. The Growth Capital Guide Leveraging Mezzanine Financing For Growth

2. Mezzanine Financing Overview What is it? Example of Mezzanine Financing When to use it? Common structures What lenders look for Pros: Benefits of mezzanine financing Cons: What to Watch Out For Lending landscape Raising Mezzanine Debt: Best practices

3. What is Mezzanine Financing Mezzanine Financing is a form of debt capital that can have elements of both debt and equity and often fills the gap between senior debt and equity in a capital structure. Mezzanine financing is also commonly referred to as: mezzanine debt, mezz-debt, subordinated debt, sub-debt, subordinated notes or subordinated debentures.

4. Example of Mezzanine Financing Representative Capital Structure Least Expensive Most Secure (most likely to be recovered if something goes wrong) Senior Debt (usually collateralized by assets like real estate or A/R) Mezzanine Financing Most Expensive Least Secure Equity

5. When to Use Mezzanine Financing Refinancing Existing Debt Acquisition Financing Management Buyouts Partner Buyouts Shareholder Dividends Funding Rapid Growth Majority or Minority Recapitalizations Financial Restructuring Business Expansion

6. Common Mezzanine Financing Structure A monthly or quarterly cash interest payment, based on the outstanding balances of the mezzanine financing. The interest rate may be fixed or floating above a base rate such as LIBOR or Prime. Cash-Paid Interest A monthly or quarterly interest payment that accrues to the mezzanine loan’s principal balance rather than being paid in cash. PIK interest allows the borrower to use that additional cash to fund growth or other obligations. Paid-in-Kind (“PIK”) Interest Warrants give the mezzanine lender an opportunity to acquire an equity interest at a predetermined exercise price. They are commonly used to increase the return to a mezzanine lender by allowing the lender to participate in the success of a company. Warrants It is also common for a mezzanine lender to invest alongside the controlling shareholder or financial sponsor for some minority equity interest. Equity Co-Investment

7. What Mezzanine Lenders Look For • Plenty of cash flow to support the total debt service payments, tax payments and CapEx • Consistent or growing cash flow profile • Strong free cash flow margins: high gross margins, low CapEx requirements • Low business cyclicality that might result in volatile cash flows from year to year • A strong management team • An enterprise value of the company well in excess of the debt level

8. Mezzanine Lending Landscape (Lower Middle Market to Middle Market) $1MM EBITDA $3MM EBITDA $5MM EBITDA $10MM+ EBITDA low Max Leverage Tolerance high 14%+ Total Cost 11-13% many few # of Providers competitive fragmented Market Dynamics

9. Pros v. Cons Benefits of Mezzanine Financing Mezzanine Lenders are Focused on Cash Flow, Not Collateral These lenders usually lend based on a company’s cash flow, not tangible collateral (assets), so they will often lend in situations when banks say no due to lack of collateral. For this reason, mezzanine financing can be a great capital option for service businesses, which tend to have leaner balance sheets.

10. Pros v. Cons Benefits of Mezzanine Financing It’s a Cheaper Growth Capital Option or Financing Alternative than Raising Equity Equity investors such as private equity firms, family offices or venture capital firms can certainly provide a much needed slug of capital, but it can come at a pretty steep price in the form of ownership dilution. Depending on the investor and situation, it’s likely those providers are trying to achieve 30%+ returns. Mezzanine financing companies target lower total returns because they’re in a more secure position than equity investors and are collecting high interest payments along the way. The cost may still seem high relative to what you’d expect from a bank, but for a rapidly growing company that is building value quickly, the interest expense may be well worth it.

11. Pros v. Cons Benefits of Mezzanine Financing It’s Flexible, Non-Amortizing Capital There are no immediate principal payments- it is usually interest only capital with a balloon payment due upon maturity, which allows the borrower to take the cash that would have gone towards making principal payments and reinvest it back into the business.

12. Pros v. Cons Benefits of Mezzanine Financing It’s Long-term Capital Mezzanine financing typically has a maturity of five years or more, so it’s a long-term financing option that won’t need to be paid back right after you borrow it – this capital is usually not used as a bridge loan to fill a short-term financing need.

13. Pros v. Cons Benefits of Mezzanine Financing Current Owners Maintain Control It does not require a change in ownership or control – the existing owners and shareholders remain in the driver’s seat, a key difference between raising mezzanine financing and raising equity from a private equity firm. It is common, however, for a mezzanine lender to have loan covenants and possibly either participation or observation rights on the borrower’s board of directors.

14. Pros v. Cons What to Watch Out For More expensive than bank debt Since junior capital is often unsecured and subordinate to the senior loans provided by a commercial bank, it’s inherently a riskier loan for the lender, hence the higher interest costs.

15. Pros v. Cons What to Watch Out For Warrants or an equity co-investment may be included For taking greater risks than most secured lenders, mezzanine lenders will often seek to participate in the success of those they lend money to by including warrants or making an equity investment alongside the primary shareholders, allowing them to increase their return if a borrower performs very well.

16. Pros v. Cons What to Watch Out For There are still some strings attached The role of mezzanine lenders is usually passive in terms of day to day decision making, however, it is common for a mezzanine lender to require some visibility of the borrower’s current and future performance. In addition to financial covenants, they may require either participation or observation rights on the borrower’s board of directors.

17. Raising Mezzanine Financing Best Practices 1 2 3 4 Prepare Run a Process Focus on Cost, Flexibility and Fit Bring in Help When Needed Financial information should be accurate and complete. Put together a confidential information memorandum that describes the organization and opportunities, as well as how the mezzanine lender’s investment will be protected and will get paid back (plus a return). Terms can vary widely, so speak with as many mezzanine lenders as possible. Running a coordinated process helps ensure the borrower is receiving the most attractive terms in the market and helps keep lenders honest and on schedule. Create a strong deal team. Despite the costs, involving a good attorney, accountant and investment banker can streamline a capital raising process, help negotiate a better deal and ensure that really expensive mistakes don’t get made. Cost of capital matters, but it isn’t everything. Sometimes a lender who truly understands and appreciates your business can take you further than the lowest cost provider, particularly when things don’t go as planned.

18. About Us Access Capital Partners is an investment bank that helps entrepreneurs and financial sponsors raise debt and equity capital for privately held, middle market businesses in all types of situations. $8.0B+ 35+ 100+ 1000+ In total transaction experience Completed transactions Years of middle market experience Relationships with capital providers and strategic buyers across the globe STRATEGY | CAPITAL RAISING | EXIT ADVISORY Members of Access Capital are registered representatives of and conduct securities transactions through StillPoint Capital, LLC, Member FINRA/SIPC, 13051 W. Linebaugh Ave., Ste. 1, Tampa FL. StillPoint Capital is not affiliated with Access Capital.

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