How to deal with sellers not willing to share Balance Sheet pre LOI?

searcher profile

August 06, 2021

by a searcher from University of Windsor in Vancouver, BC, Canada

Dear Fellow Searchers,

I was wondering if anyone here can suggest the best strategy to approach sellers that are only willing to share financial balance sheet, Opex budget, and customer concentration "post" LOI and not in the CIM.

I am also interested to understand the buyer liability of signing LOI vs IOI. I would really appreciate it if any of you could share your thoughts or experience on how to adopt the best strategy in cases like this.

Thank you!

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commentor profile
Reply by an intermediary
from The University of Chicago in Chicago, IL, USA
Seller should share the balance sheet. But, M&A is not an exact science. There are times for exceptions. Here are possible reasons.
1) Business is too good (see example below).
2) Seller means IOI but says LOI.
3) Seller is at early stages of exploring sale.
4) Seller is trying to convince son/daughter to step up to the plate by showing an offer.
5) Seller is under-performing relative to profit i
6) Seller has high debt from prior event.
7) Seller is not convinced about buyer skill, attitude, resources, etc.
Example: Very brief. I was representing a buyer with $300 m in US sales and a subsidiary of an European parent. US CEO and I flew to meet the seller. He met us in the parking lot. No entry to business, Went for lunch. Zero financials. Seller told us to send us an LOI with x multiple (which was very high). All he would share with us is that the profit is approx. $Y and that the business is stable. He did not even share the "business model". He would not even tell us number of employees. We came back and had many internal management meetings. Developed a P&L and BS of the seller (knowing only profit is $Y). Flew back to seller with IOI (LOI level details, but changed the title to IOI). Seller met us in the parking lot but took us for lunch at his home. He rejected the IOI. Wanted all cash and proof of funding. Still no more financials. We came back and revised the IOI and sent to seller's home. He was happy. Next day we got FedEx with financials. Profit was $Y, but everything else was way off from our analysis (but very positive, too good to believe). We made minor changes to the IOI, and sent an official LOI.
This was one of the best businesses that I have seen in my 35 years.
Learned a lesson: Seller is in the driver's seat.
commentor profile
Reply by a searcher
from Princeton University in Annandale, Clinton Township, NJ, USA
Plenty of great points above--a couple of additions. 1) I'd tell the seller it's pretty important to look at the balance sheet to determine a business' valuation. You'll want to at least see all of the assets and the current liabilities at the very least so you can understand the asset base of the business and the working capital (both critical when you think about how much debt you can comfortably put on the business). 2) A lot of comments suggesting the business is probably over-levered. If they have too much debt, that shouldn't really impact you since you will be recapitalizing the business if you acquired it. They may want to hide how much leverage they have so you don't use it against them. If they are having issues paying their lender, then the lender may be the ultimate decision maker in a sale which no seller wants a buyer to know.
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