Shoot The Moon

Can The Buyer Actually Pay? Understanding Buyer Credibility in M&A

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EPISODE 218. Vet the Buyer’s Financial Capacity Like a Pro! Mike Harvath, Matt Lockhart, and Ryan Barnett discuss the importance of verifying a buyer’s financial credibility in IT services M&A deals. They emphasize understanding the buyer’s type, whether a financial or strategic buyer, and their ability to secure funding. Mike explains the role of limited partners in private equity funds and the differences between independent sponsors and established private equity firms. They highlight the significance of commitment letters, proof of funds, and the importance of a balanced deal structure. The discussion underscores the need for transparency, early due diligence, and the role of advisors in qualifying buyers and ensuring a smooth transaction process.

 

1. “How do you like to qualify whether a buyer actually has the capital to close a deal?”

  • Gut check vs. formal proof
  • Differences between PE-backed and strategic buyers
  • What’s reasonable to ask for and when in the process

    • 2. “What are some of the best ways a buyer can demonstrate proof of funds early in a process?”

    • Equity commitment letters
    • Bank letters or balance sheets
    • Fund-level detail for PE buyers
    • Is a LOI ever enough?

      • 3. “When you see a buyer lean heavily on an earnout or seller note, what does that tell you about their financial strength?”

      • Earnouts as risk-transfer vs. alignment tool
      • Sign of limited capital vs. aggressive valuation
      • How to structure a seller note to reduce risk

        • 4. “Have you ever had a deal fall apart because the buyer couldn’t come up with the money?”

        • Anecdotes of broken deals or red flags missed
        • What should have been asked earlier
        • Lessons learned about screening buyers

          • 5. “What questions should sellers be asking to vet a buyer’s financial capacity?”

          • Go-to questions to ask PE firms, family offices, strategics
          • What not to ask (or how not to ask it)
          • How advisors help behind the scenes to validate

            • 6. “If a seller gets an offer that looks strong on paper — big multiple, big earnout — what’s your advice for validating it’s real?”

            • The danger of being ‘seduced by the headline multiple’
            • Discounting for deal structure risk
            • How to tie offer strength to real-world execution ability

              • 7. “Are there particular red flags you see when a buyer isn’t financially credible?”

              • Delayed diligence or ghosting
              • Lack of transparency around capital source
              • Too many approvals needed — unclear decision-makers
              • Offers contingent on future fundraising

                • 8. “What’s the advisor’s role in protecting the seller from wasting time with unqualified buyers?”

                • Quietly vetting buyers behind the scenes
                • Managing buyer engagement based on credibility
                • Pulling in references or past deal history

                  • 9. “What’s your take on PE firms that haven’t yet closed a platform in the space — does that change how we qualify them?”

                  • Platform vs. add-on credibility
                  • Operational readiness of first-time buyers
                  • Importance of fund age and deployment schedule

                    • 10. “At what point in the process do you think it’s fair for a seller to ask for hard financial evidence?”

                    • Pre-LOI vs. post-LOI
                    • How to handle it without offending
                    • When to walk if transparency isn’t there

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                      Episode 99: IT Services Sellers: Evaluating the Size of a Buyer. Listen now >>

                       

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