Broker's request for proof of financial capacity

A key friction point between buyers and brokers in the #smb #eta world is around requests for buyer proof of financial capacity. For today's thread, I'm going to break down this process in more detail to hopefully turn down the temperature on this part of the negotiation:

One of the worst possible outcomes of a small business deal negotiation is an acquisition that falls apart because the buyer fails to provide the funds required to complete the transaction. This kind of engagement saps the financial and emotional resources of the seller.

As the seller’s main advocate, a good business broker will seek to avoid this situation by weeding out financially-needy buyers at the beginning of the process, before they have the opportunity to build a relationship with the seller.

While this strategy makes sense, it creates a set of conditions that can negatively impact aspiring small business buyers, particularly those without substantial financial backing. Here are a few options for buyers that can help move this conversation forward:

1) Bank Statements can go a long way towards demonstrating your financial health if you are planning on funding the down payment on a loan yourself, rather than raising funds from investors. Feel free to keep bank snapshots high level at this initial stage.

2) Proof of Assets: Many buyers won’t necessarily have the entire downpayment for a multi-million dollar acquisition available in cash. If you’re planning on selling investments, providing evidence of the value of these investments (like a portfolio snapshot) can be helpful here.

3) Letter from a Financial Institution: If you’re going to finance the bulk of your acquisition with a loan, you can bring comfort to the seller and broker by demonstrating that you’ve done initial work up front to secure the needed financing. This means being able to explain how you’re looking to structure the financing and providing evidence that a financial institution is likely to lend to you at the needed terms. It can often help to approach more than one bank so you can still close if one falls through.

4) Investor Backing: While being able to raise money from investors for your acquisition is a big win for buyers, most brokers have experienced deals where promised investor funding didn’t come through at close, killing a once-promising deal. This is especially true for independent sponsors that are relying on untested investors to provide cash at close. You can alleviate concerns by sharing information about the investors themselves, particularly their track record investing in the SMB space.

Ultimately, it might be difficult for buyers to provide all or even some of this documentation. Remember that there are no absolutes in SMB acquisitions: you can try to overcome a “weakness” in one area by demonstrating strength in another.