Inquiry on "proof of funds" requests from vendors
January 19, 2021
by a searcher from University of Pennsylvania - The Wharton School in Toronto, ON, Canada
All,
In regards to active deals that you are working on, have you ever been requested to provide proof of funds?
I am dealing with this situation at present, and have to date provided equity support letters denoting equity commitments from each equity backer in excess of the prospective deal value (deal in the C$15mm to C$20mm range).
However, the vendor (and/or the broker) are being belligerent to request an actual proof of funds to show cash / liquid assets in a bank statement or trading account in excess of the entire deal value.
While the deal is pre-LOI, I have some soft interest from equity sources and prospective interest from lenders but seem to be stuck in this circular request loop for "actual" proof of funds, like we are buying a house or something.
Any thoughts from people's experiences as this seems to be a very off-market request.
Regards,
David
from University of Witwatersrand in Johannesburg, South Africa
I’ve come across this issue as well and my thoughts are as follows:
1. A motivated seller is a key factor for a successful deal. I question the seller’s true motivation to sell if they are willing to turn away a potential buyer with commitment letters from equity partners. Sometimes these sellers are just testing the waters and will only sell on their terms because there is no external motivation like health, retirement etc. They are typically younger, healthy and looking to cash out for “lifestyle” reasons.
2. Brokers are just looking to close a deal and they go through a lot of tyre kickers. I get the impression that they are quite unfamiliar with how capital is raised and deals executed in the PE world so they sell a mid market company the same way they sell a laundromat.
I personally just moved on because I believe there are good deals out there with genuine motivated sellers.
I definitely think there are some excellent brokers out there and you’re probably better of building a relationship with some of the good ones that are on the same page as you.
I have also had some positive interactions when working directly with sellers, they tend to share information more freely and I enjoy building rapport with them.
I think at the end of the day, this is a people game and building trust with brokers/sellers is crucial but also try and identify the truly motivated.
This is my perspective and I hope it helps.
Goodluck!
Atish
from Ivey Business School at Western University in Toronto, ON, Canada
In essence, "Let me submit an IOI, learn more about the business, and if I pursue and submit an LOI I will include more financing details (for example, co-signing the LOI with equity sponsors with committed funds).
Hope that helps. For what it's worth, when I've encountered this and the brokered has been unwilling to work with me without proof of funds I simply move on.