The Broker asked for Proof of Funds/Prequal letter....what do I do?
July 11, 2024
by a searcher in Rindge, NH 03461, USA
Brokers asking buyers for a pre-qual letter or proof of funds is a 'trick question' that functions as a very effective 'litmus test' by the broker to find out if the buyer is inexperienced. Brokers are flooded with lots of inquiries, sometimes over 100 on each deal. They don't have time to interact with everyone so need to disqualify most of the inquiries. Ignoring inquiries and waiting for serious buyers to pick up the phone and call is one way they screen buyers. And asking for proof of funds/pre-qual letters is another. Experienced buyers know that this is a trick question and they don't provide either one. Inexperienced buyers think they actually have to provide this when they don't. Don't get sucked into the trap of answer/providing this. Everyone with any experience knows, as do the brokers who are asking, that proof of funds and bank pre-quals mean absolutely Nothing. The 'experienced' answer is to push back and 'call their bluff'. What the broker is trying to determine is if you are experienced or not. If you stand up, push back and talk like you know what you are doing, 90% of the time the broker will quit asking for stupid proof of funds and engage with you as a serious buyer. So, my advice is stop falling for the trick question, it only confirms that you are a newbie.
from University of Pennsylvania in Charlotte, NC, USA
"Experience" and capital don't necessarily go together. A potential buyer may have acquired, founded or invested in companies in the past, but that doesn't mean they currently have the capital or ability to source it for the deal at hand. This one may be a larger deal, or inherently less appealing to investors and bankers, etc. The sell-side advisor doesn't have the time or inclination to do due diligence on the demonstrated (not just claimed) "experience" of each potential buyer.
As a buyer/investor, I personally don't consider this a "trick" question. I can choose to 1) discuss my capacity and capabilities with the sell-side broker, 2) provide the requested information, or 3) move on to a different deal. Doing 1) or 2) is not going to cause the broker to consider me a "newbie", in fact it does the opposite. I could argue and refuse. but for what purpose?
I've seen this far too often and I'll bet other investors here have too: Unfortunately, some searchers try to talk a good game and superficially sound like they know what they're doing, even up to bluffing their way to signing an LOI. Then it turns out they have no capital and little or no idea of how to structure a deal or source the capital or complete a transaction process. It's highly unlikely they're going to close the deal. Seller, sell-side broker and for that matter the buyer parties have wasted a lot of time and money. A buyer qualification that included a "proof" of ability to finance could have prevented that failure.
from Oklahoma State University in Memphis, TN, USA
In my 20 years of M&A advisory work, I have had one experience in which a self-funded search fund entered into a LOI with one of my clients and, ultimately, the transaction did not close because they could not arrange financing. It was annoying because they misled us about where they stood with financing and it caused us a substantial delay. I doubt, however, that requesting a "proof of funds letter" would have made any difference. There were signals that were concerning and, in retrospect, I wish I had addressed those signals more forcefully. (For perspective, this occurred during the pandemic.) A "proof of funds letter" seems unnecessary, BUT demonstrating that you are a serious buyer who can get a deal done is a normal part of the M&A process.