Proof of Funds
March 13, 2024
by a searcher from University of Northern Colorado - Kenneth W. Monfort College of Business in Denver, CO, USA
How do searchers navigate when brokers require proof of funds to submit an LOI? A lot of searchers are looking for businesses that would be out of reach without outside investor help. There have been brokers who want proof of funds shown before moving forward with the deal. Most searchers don't have $500K+ in funds to show and most investors want to see a deal when it's already under LOI to make commitments. Has anybody had success navigating around this?
in Houston, TX, USA
There are a couple ways to handle it. You have to understand that everybody involved in a deal has their own motivations for being involved. Once you understand what their motivations are, it's easier to know what needs to be done to build the rapport/trust required to navigate situations like this.
If the deal is one that you're very interested in and believe you can successfully finance, do what you need to do to show that and build trust with both the broker and the seller. This may mean that you need to build relationships with investors who are interested in the industry you're targeting before you find a company you want to make an offer on - even as a self-funded searcher.
If your primary funding is coming from the SBA - understand that this will mean some deals aren't gonna be a match for you. There are lots of listings - especially brokered ones - that are looking for strategic cash buyers. That's totally ok - that just means that opportunity will require you to figure out how to finance it without the SBA or move on to the next opportunity that is ok with SBA funding.
If you want to lean harder into more of a "zero-down" adjacent/creative financing deal - your best option will be to go for off-market deals as there's no real incentive for brokers to wait on a payout from a seller's note that may or may not end up on standby.
The main point here is to align your search parameters with your willingness/ability to finance the deal in the way that works best for both you and the seller. There are tons of different ways to get a deal done - it's just up to which hoops you're willing to jump through for a deal.
from Washington University in St. Louis in Chicago, IL, USA
To start- Why would you wanna build a boat once the storm is already at your doorsteps?
Could you imagine running around trying to bridge a equity gap after your precious letter of support landed you a signed LOI? Sir! you now ONLY need to bring 700K in equity in 2-3 weeks. (I was in this situation due to naiveness when I started)
When LOI is signed- last thing you want to worry about is trying to finance the deal instead of focusing on DD.
- Why not build relationship with the search investors and community upfront
- There are plenty of industry agnostic search investors that specifically invests in self funded searchers. Get 15 mins, introduce yourself. Learn about their criteria and what type of deals they will fork the money on.
- Build relationship with the lenders. Join their weekly "Q&A" calls. Learn about the lender's appetite for the deals in your focus industry. What their criteria are etc.
You should have 2 to 3 investors that would be willing to give you money. Should add up-to roughly 5-10% of the PP depending on the size you are targeting.
And should have 2 lenders that you could text "What's up, you up?" on Sunday night.