Below are some thoughts on investor commitments: why it's prudent to obtain more commitments than necessary to close your deal and why it's important to maintain regular communication with committed investors before closing.

This article comes from our newsletter that goes out to searchers and independent sponsors who have previously connected with Main Street Capital Network (a syndicate of 150+ SMB investors—individuals, family offices, and funds).

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If you're a searcher or independent sponsor who expects to raise equity in the future, don't hesitate to contact us here if you believe your deal will fit our investment criteria. We like to connect with acquisition entrepreneurs at all stages (currently searching, preparing an LOI, or under LOI).

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Investor Commitments

When raising equity, remember that it's not a done deal until the investor signs your legally binding subscription agreement. Unfortunately, this is true regardless of whether they've given you a verbal commitment or a written indication of interest.

Practically speaking, this means two things:

1. Secure more capital commitments than are required to close the deal (within reason!)

2. Don't stop selling your deal until investors sign your subscription agreement

There are many reasons why an investor who commits to your deal might change their mind. That will be the topic of another note, but for now, the critical thing to remember is that it's not uncommon.

Secure More Capital Commitments Than Are Required To Close the Deal

This is a bit of a balancing act.

Telling a few investors that you won't be able to allocate quite as much equity as you had previously indicated might disappoint them, but a sophisticated investor will understand (and respect) your prudence in securing a bit more capital than required.

Please don't overdo it, though. At a certain point, you are wasting people's time. Having numerous people spend time doing diligence on your deal, committing, and then not getting an allocation is a good way to damage your reputation.

A good rule of thumb is to approach each investor as if you may come to them again with another deal some time in the future.

Don’t Stop Selling Your Deal Until Investors Sign Your Subscription Agreement

It's very telling to see how searchers and sponsors respond to an IOI or verbal commitment. Some continue providing weekly or bi-weekly updates, while others go quiet for weeks.

Do not stop communicating with your potential investors! Notice how I said "potential." They haven't wired you the money yet. Transactions are busy and chaotic, but spend an hour each week or every other week providing a transaction update to those who have committed to providing you with capital.

There are two important reasons why you should be doing this.

First, this is the initial test of how you will communicate with your investors post-close. Providing consistent and substantive updates demonstrates that you view your investors as partners and not just as a source of cash.

Second, individuals and many family offices don't have standardized investment processes. If you go quiet for four weeks, they may forget about you. While this might be the most important event of your professional life, I can assure you that that's not the case for a minority investor in your deal. You don't want them allocating capital they committed to you to another deal because they forgot about yours. Liquidity is a finite resource.

An “I’m In” Is Just the Beginning

Unfortunately, investors are not truly committed to your deal until they sign on the dotted line. Securing commitments for a bit more capital than necessary and maintaining regular communication can mitigate the risk of a last-minute change of heart.

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You can learn more about Main Street Capital Network here.