Dealing with Proof of Funds before revealing detailed financials?

April 24, 2020

by a searcher from University of Rochester - William E. Simon Graduate School of Business in Los Angeles, CA, USA

Has anyone dealt with brokers / owners of businesses that ask for proof of funds before they offer to open up the books for you? This is a chicken and egg problem I've been running into and I'm having a hard time getting around it given that I'm currently self-funded? Any advice on how I can get to the books to better evaluate whether its suitable for acquisition?

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Reply by an investor
from University of Pennsylvania in Charlotte, NC, USA

My M&A advisory firm operates as a sell-side advisor, buy-side advisor and selectively as a principal investor, so I appreciate the different perspectives. I have to agree with ^redacted‌ and other intermediaries' comments above. As a sell-side advisor, we serve our clients in part by qualifying potential buyers and engaging with those who can credibly demonstrate access to the resources necessary to close a transaction. We expect that serious searchers/potential buyers will have invested time and effort in establishing strong (potential) investor relationships, defining their investment criteria and appetite, and being able to speak to the track record of those investors - and will have documented all of this in marketing materials of some kind. Some suggestions above such as offering a "fund interest equity term sheet" or similar letters of interest are good. Similarly, if your (potential) investors have given you permission to disclose their names in your marketing materials, that lends credibility. Please note, my comments assume that the sellers in the transactions you're looking to access are providing at least a "teaser" summary of their business model, products/services, customer base and headline financials (revenue, gross profit, EBITDA) that you evaluate to decide whether to pursue the opportunity.

Reply by a searcher
in Newport Coast, Newport Beach, CA, USA

I am a self-funded acquirer too, and I do get asked this question by brokers at least 50 percent of the time. Although I wasn’t thrilled about this at the beginning of my acquisition process, I now understand it’s very reasonable in the M&A space, and I don’t take it personally. I know the brokers are trying to protect their clients because there must be a lot of so-called ”buyers” that are not serious. I recently sold my home residence, and we required a prequalified letter from the buyers before they could enter our house for a private showing. This process is very similar, and in hindsight, I am glad we did because this process screened out a lot of people. If you have funds available, it shouldn’t be that much of hassle even though I do understand it’s frustrating when you are sharing financial information when you aren't sure what you are trying to buy. I would recommend asking some very generic questions that would make you feel more comfortable before sending your proof of funds. Think of one or two deal killers for you that you may be able to get answered without disclosing your financials. I hope this helps

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