Searchers: It’s Time to Ask Your Investors for Proof of Funds

This Week in ETA:

• Searchers: If you’re raising money from investors, it’s important to make sure those investors actually have the money they’re promising you. Just like sellers and brokers ask for proof of funds from you, searchers should be doing proof-of-funds checks on their investors. It’s easy to assume that every commitment is backed by actual capital, but that’s not always the case. Many syndicates don’t commit their own money; instead, they commit to you and then go out to raise the funds elsewhere. That means their “yes” isn’t really a yes—it’s a “hopefully soon.” We’ve seen deals get rocky when a syndicate can’t raise what they expected, backs out late in the process, or leaves a searcher scrambling at the eleventh hour. The fix is simple but overlooked: ask your investors the same question sellers ask you—“Is this capital you already have, or capital you still need to raise?”

• Investors: I wrote a piece for the Pioneer Buy-Side Brief on the investor terms that are now (mostly) standard for self-funded search deals. Whether you’re new to ETA investing or just looking for a refresher, I break down 1) preferred return, 2) distribution waterfall (return of capital), 3) step-up, and 4) minority investor protections. We occasionally get asked how we can invest in compliance with SBA guidelines. Under SBA rules, investors can’t require distributions at any point, but they can structure their equity as a participating preferred investment that accrues a preferred return if unpaid. I also unpack how we maintain minority investor status and why it’s so valuable for searchers to understand these terms when approaching investors.

Partner Perspective:

Eli Albrecht, Albrecht Law:

Too many buyers think deals are won with purchase price structure, terms, or models. In reality, the Sponsors/Searchers who get to closing are the ones who build real human relationships with the seller and other stakeholders. I remember a story of a private equity group I represented a few years ago who closed a difficult, but critical deal by leveraging a handshake and seller's favorite beer and tacos. You can read more on that story here (it involved a last-minute flight to the Midwest, a Sam Adams beer run, and a closed deal), but the takeaways are applicable whether you're a PE group, an independent sponsor, or a self-funded searcher.

Here are soft-skill keys to getting your deal closed:

1. Sellers are not just evaluating the offer, they are evaluating you. Your honestly, integrity, consistency, ability to listen, and your willingness to treat them as a partner in the process matter as much as any EBITDA multiple.

2. The buyers who close are the ones who show up as human beings. They spend time with the seller, ask genuine questions, and build trust long before the hard conversations start.

3. Spending time and resources getting to know the seller upfront can save your deal later on. When issues inevitably pop up - purchase price structural changes, working capital, diligence surprises - that foundation lets both sides navigate friction without blowing up the deal.

4. Meet in person. Make sure you meet the seller in person. The in person connection will create the glue needed to get through tough times in an M&A process (or to circumvent a bad advisor).

5. Look out for important stakeholders. Sometimes, unbeknownst to a buyer, there are other important stakeholders that are impacting the transaction. Find out who those people are and engage with them.

Plus:

• Hard-won lessons from a searcher who recently closed on an acquisition.

• I made a list of roughly 50 sites that list businesses for sale. Let me know if I have missed any!

Question:

Hit reply and tell us - What other questions do you have on the standard self-funded search investment terms?