Presenting Your Deal’s Risks to Investors

At Main Street Capital Network (a syndicate of 130+ SMB investors—individuals, family offices, and funds), we periodically send a newsletter to acquisition entrepreneurs we've connected with. This week's article discussed how to present your deal's "yellow flags" to investors. I'm sharing it below with the Searchfunder community in case others find it helpful.

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Presenting Your Deal’s Risks to Investors

No deal is perfect, and all sophisticated investors are aware of this.

If your deal has obvious yellow flags, I recommend you address them immediately. I often see teasers and presentations with decreasing revenue, volatile margins, high customer concentration, etc., but no accompanying explanation of what is driving this or how these risks are expected to be mitigated.

If you don't provide a good explanation for your deal's yellow flags, investors will generally assume that there isn't one and pass. They are unlikely to set up a time to speak with you in the hopes that you will provide a satisfactory explanation if you haven't already at least hinted at one.

While you don't need to include an exhaustive list of everything that could go wrong in your acquisition, you must demonstrate to investors that you've at least considered the risks they will be most worried about.

In any document in which you present information likely to worry a thoughtful investor, I recommend you pair that information with an explanation of the underlying drivers and how you plan to mitigate that risk. Investors don't expect your deal to be perfect!

If two customers make up a large portion of the business, explain what it is about these relationships that still make you comfortable with the deal.

If a teaser shows revenue or margins that have been volatile for years, briefly explain what is driving this so investors have context for what is happening in the underlying business.

Addressing the elephant in the room head-on demonstrates your thoughtfulness. A convincing argument can keep investors engaged and persuade them of your perspective. After all, you are well aware of these risks and willing to bet your time and capital on the deal.

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You can learn more about Main Street Capital Network here.