Entrepreneurs generally assume that when a potential investor talks to them, that the investor has the money available. This is not always true.
Recently a client spent six months working with one buyer group on a multi-million dollar deal only to find out at the last minute that they could not write him a check. Instead they wanted him to finance them over a long period of time.
Part of the deal was that he would continue to be available to help the company. In the seller’s eyes, he was essentially going to be paid the same amount of money he is making now and after a period of time he would no longer own his own company.
The seller was expecting to have a large check in his pocket which he could use to fund his next project. Now, he could not do that and would be making the same money as before but lose control of his company. Why would he do that? Obviously I am simplifying the situation but essentially the seller said no. Quite frankly, the seller never asked early on what kind of terms they were seeking at the top level view. This means, are they investors willing to write a check, or needing outside financing (that they could get with their financials), wanting self-financing by the current owner, or a combination.
Any one of these structures is okay.
The seller should have asked three simple questions:
1. What deals have you done before?
2. How were those deals structured?
3. How do you think you would structure this deal?
Most likely he would have gotten no answers, and that would be indication that these “buyers” were not able to buy.
There is nothing wrong with asking potential investors about their capabilities. It just needs to be done in a diplomatic professional manner.
