When do you engage investors in the search process?

August 03, 2022

by a searcher from University of St. Thomas, Houston in New York, NY, USA

I am pursuing a search in which I plan to use a combination of investor cash + SBA for deals in the $2-3M range. I will put in roughly $100k, and raise another $150-$250K from investors to support the down payment. At what stage is it important to have the investors lined up to support you?

I have noticed a few different themes here. 1) Funders will want to have a clear understanding of who will help you raise the additional capital. 2) Brokers and Sellers want confirmation of funds / funding prior to going down the rabbit hole with you. 3) Investors will often want to see a company, return metrics, and detailed explanation of the company, industry, etc. prior to committing anything.

These three items seem to create a conflict in the approach of what comes first.

My thoughts are that I reach out to family/friends first, educate them on the model, high level returns expectations, investment structures, etc. early on. This will help them gain comfort with the process and build general expectations of what types of returns they might make along with selection process. For those that are interested, I get a soft commitment for X amount of funding and will include them in the decision making and deal selection process.

For non-related investors (for example, those in the forum), I would only reach out once a deal is active and I need to fill a gap for the down payment.

I would be interested in everyone’s thoughts here.

Reply by a searcher
from University of the Sciences in Philadelphia in New York, NY, USA

Hey Omer, the earlier you can build rapport and relationships with prospective investors, the better. This includes communicating with them about what you listed above as well as potential deals you've looked at and why you passed on those deals. Then, investors will learn more about your discipline and decision-making process. (Most skip this step. And, it even works when speaking with lending officers for commercial debt or an SBA loan.). This builds trust with potential investors but also takes months for that to play out. We've gotten around showing proof of funds to brokers/sellers by explaining that we're backed by a family office that demands privacy and POF will not be disclosed early in the process. If that's a dealbreaker for the broker/seller then we move on. They typically come back to us to re-engage and continue the conversation, leading to an NDA, viewing their financials, beginning early due diligence and negotiations.

Also, you can contact business owners/executives directly for potential off-market deals where they may not even have broker. I shared a post a few months ago about how we get off-market deal flow by sending owners cold LinkedIn messages, and mailing them paper letters. And, that post got a lot of engagement.

Reply by a searcher
from Harvard University in Fort Wayne, IN, USA

If you are looking in the $2-3m range and tell the broker / seller you are using an SBA loan, most will assume you can pull together the $200-300k easily (or you have it on hand already from an inheritance, selling a house, or family money).

Crazy to say, but that’s not a lot of money these days in this world.

Sophisticated investors want in early for feedback on the deal (price, structure, etc). F&F won’t care nearly as much (as long as they don’t feel rushed to decide). Reality is the better deal you find and negotiate, the easier it will be to raise from anyone.

But just keep in mind it’s incredibly tough to juggle a seller eager to move on, a healthy DD process, AND a major fundraising effort. The investor piece is the one part that can be done, at least in part, ahead of time.

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