In the world of business acquisitions, trust is critical. One way buyers of small businesses can help establish this trust is by providing proof of financial information to brokers and sellers. It’s a practice that not only validates the credibility of buyers but helps ensure the deal ultimately closes.
This article covers the importance of providing proof of financial information, what buyers should share, and why brokers ask for it in the first place.
Why Proof of Financial Information is Essential
Similar to the way buyers evaluate businesses for sale to identify potential deals that fit their investment theses, sellers and their representatives analyze potential acquirers carefully before selecting the right partner.
Key factors in this analysis include the buyer’s experience, background, and plans for the business, along with the personal relationship established during the vetting process.
However, to a broker and seller, even the most prepared and likable buyer is ultimately a waste of time if they’re unable to close the acquisition at the negotiated price.
One of the worst possible outcomes of a small business deal negotiation is an acquisition that falls apart because the buyer fails to provide the funds required to complete the transaction. This kind of engagement is not only time-consuming, it saps the financial and emotional resources of the seller.
As the seller’s main advocate, a good business broker will seek to avoid this situation by weeding out financially-needy buyers at the beginning of the process, before they have the opportunity to build a relationship with the seller.
While this strategy makes sense, it creates a set of conditions that negatively impact aspiring small business buyers, particularly those without substantial financial backing. Brokers screen buyers for their financial capacity up front, asking for evidence that buyers can successfully finance the deal.
To an inexperienced buyer, these requests can feel like a violation. In reality, buyers who are serious about acquiring a business need to be open about engaging with brokers about their financial capacity early, before signing a letter of intent (LOI) and often before receiving a confidential information memorandum (CIM).
Here’s how buyers can navigate this process gracefully and earn the trust of sellers and brokers along the way:
What Buyers Need to Bring to the Table
Brokers will typically ask for proof of financial capacity after the buyer reaches out about a listing and signs a non-disclosure agreement. While you may not be comfortable sharing your full personal financial history, being transparent about your strategy to finance the transaction and your progress in implementing that strategy can help establish a relationship of trust early in the negotiation process. Here are a few options for buyers that can help move this conversation forward:
- Bank Statements: Depending on your level of comfort sharing this information, bank statements showing sufficient balance for a down payment on the business can go a long way towards demonstrating your financial health. This is particularly important if you are planning on funding the down payment on an SBA loan yourself, rather than raising funds from investors. Feel free to keep bank snapshots high level at this initial stage.
- Proof of Assets: Many buyers won’t necessarily have the entire downpayment for a multi-million dollar acquisition available in cash. If you’re planning on selling investments (whether these are securities or real assets), providing evidence of the value of these investments (like a portfolio snapshot) can be helpful here.
- Letter from a Financial Institution: If you’re going to finance the bulk of your acquisition with a loan, whether it’s an SBA loan or some other kind of debt, you can bring comfort to the seller and broker by demonstrating that you’ve done initial work up front to secure the needed financing. This means being able to clearly explain how you’re looking to structure the financing and being able to provide evidence that a financial institution is likely to lend to you at the needed terms. While SBA lenders won’t usually offer blanket assurances without examining the specific deal in question, you can get letters of support from banks to demonstrate that you’ve engaged them early in your acquisition process. It can often help to approach more than one bank. That way, if one pulls out unexpectedly, you’ll still be able to get the deal done.
- Investor Backing: While being able to raise money from investors for your acquisition is a big win for buyers, most brokers have experienced deals where promised investor funding didn’t come through at close, killing a once-promising deal. This is especially true for independent sponsors that are relying on untested investors to provide cash at close. You can alleviate concerns by sharing information about the investors themselves, particularly their track record investing in the SMB space and their assets under management. If your investors are inexperienced, try other creative solutions, such as letters of support or evidence of funds in separate accounts for the acquisition, to help alleviate broker concerns.
Ultimately, it might be difficult for buyers to provide all or even some of this documentation. Remember that there are no absolutes in SMB acquisitions: you can try to overcome a “weakness” in one area by demonstrating strength in another.
This means being organized, knowledgeable, responsive, and considerate. If you’re a perfect fit in other ways, brokers may be willing to move you through their process even without a perfect proof of funds.
Additionally, depending on the size and complexity of the deal, the broker, and the expectations of the seller, the required proof of financial information can vary.
Always confirm with the other party the documents they are expecting before sending anything over.
Like it or not, demonstrating financial capacity is an established piece of the acquisitions process. By knowing what to show and easing broker concerns up front, you can maximize your chances of moving forward with a deal. Be transparent, be honest, and show them you have the financial piece of the transaction under control.
Ready to take the next step in your business buying journey? At Private Market Labs, we’re here to help. Visit our resource section for more insights, and let us know how we can help make your acquisition goals a reality.