What Business Owners Can Expect During the Due Diligence Process When Using Mezzanine Debt

Understanding the basics and functions of mezzanine debt can be helpful when a business owner is considering making a major investment, buying out a partner, or planning for the transfer of a family business to the next generation.  Mezzanine debt, a combination of typical bank debt and equity, is also known as subordinated debt. Once a business owner decides to use mezzanine debt for their specific financing need, the owner typically signs a Letter of Interest (“LOI”) to formalize the selection of a specific mezzanine lender. Once the LOI is executed, the mezzanine lender typically starts a 45-60 day due diligence process prior to actually funding the investment.

Due to the high level of information requests, due diligence can be quite an arduous process for the business owner. Although it can be stressful, the due diligence process typically allows a business owner to thoroughly analyze all different aspects of their business. This helps add clarity to the business model by bringing to the forefront any critical issues that may need addressed along with which growth objectives to pursue. Below is a quick outline of the key due diligence items that FNB Capital typically performs during our due diligence process.

Legal Review

A legal review is completed by FNB Capital’s counsel to make sure there are no major outstanding legal issues associated with the Company. Some typical focus areas include review of the business structure, customer contracts, employment agreements, existing leases and any historic or pending litigation against the business.

Background Checks

3rd party background checks are completed to ensure key executives at the Company do not have criminal backgrounds.

Quality of Earnings (QofE)

A QofE is performed by an outside accounting firm to verify that the key financial metrics that the business owner conveyed are, in fact, accurate. One of the most important topics is confirming the presented EBITDA because most business owners include “addbacks” to EBITDA that need verified by a professional accounting firm.

Environmental Analysis

An environmental review is completed on the Company to make sure there are no current or legacy environmental liabilities associated with the business. Manufacturing and chemical companies are much riskier from an environmental perspective than an information technology or healthcare company.


An insurance review is performed on all existing policies at the Company to ensure coverage is adequate and/or whether other policies should be purchased.

Customer Calls

Brief 5-10 minute customer calls are held with 3 to 4 of the Company’s top customers to validate that the quality of service and relationships are as strong as the business owner has conveyed. Typically these are performed within 1 to 2 weeks before the anticipated closing date.

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