How red is the flag on a very young target company?

searcher profile

August 26, 2024

by a searcher from Columbia University - Columbia Business School in New York, NY, USA

Concisely: How Red is the Flag?

I am in a pre-LOI stage with a company that checks a lot of our boxes: Recurring revenue, low capital intensity, industry experience... However, the company is only 2 years old. I am interested to hear your opinions on how red is the flag, and what would be key things you would look into, apart from the obvious "why sell?" and "it could disappear as quickly as it appeared".


Thanks!

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Reply by a searcher
from University of Pennsylvania in Miami, FL, USA
Float the idea of a large forgivable seller note to gauge the founder's confidence in the future of the company post transition. Their response will be illuminating.
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Reply by a lender
from Eastern Illinois University in 900 E Diehl Rd, Naperville, IL 60563, USA
If you are looking for financing, the lack of sustained history is going to be a challenge for lenders. Most lenders want to see three years of financial history at least. If you only have two, I would suspect the first year likely was not as strong as the business ramped up. If you only have one year of sustained cash flow to support debt service it will be very hard to find financing. Happy to discuss if you need assistance. You can reach me here or directly at redacted
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