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?”
2. “What are some of the best ways a buyer can demonstrate proof of funds early in a process?”
3. “When you see a buyer lean heavily on an earnout or seller note, what does that tell you about their financial strength?”
4. “Have you ever had a deal fall apart because the buyer couldn’t come up with the money?”
5. “What questions should sellers be asking to vet a buyer’s financial capacity?”
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?”
7. “Are there particular red flags you see when a buyer isn’t financially credible?”
8. “What’s the advisor’s role in protecting the seller from wasting time with unqualified buyers?”
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?”
10. “At what point in the process do you think it's fair for a seller to ask for hard financial evidence?”
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00:00 | Mike
Hello, and welcome to this week’s Shoot the Moon podcast, broadcasting live and direct from Revenue Rocket world headquarters in Bloomington, Minnesota. With me today are my partners, Matt Lockhart and Ryan Barnett. Welcome, guys.
00:25 | Matt
Thank you, Mike. Great to be here. Spring has sprung—at least here in Minnesota we could call it pollen season. I’m sure that’s true elsewhere, too. We’re fired up and ready to roll. What’s going on, Ryan?
00:45 | Ryan
Yes indeed—it’s another good week in the world of IT services M&A. On this podcast, we discuss all things M&A for tech-services companies. If you have topics you want us to cover, let us know at info@revenuerocket.com.
Today we’re tackling a question sellers don’t always ask soon enough. It’s simple to ask but not always simple to answer: Can a buyer actually pay? It’s easy to get excited by a big offer—sometimes above market—but the buyer may not have the cash or backing to close. If they can’t close, nothing else matters. So how do we sniff out credibility and avoid wasting time on a deal that can’t fund?
Mike, when a buyer expresses interest, how do you qualify whether they truly have the capital to close?
02:06 | Mike
Great question. First, understand who the buyer is and how they plan to fund. Are they a financial or a strategic buyer? A strategic with backing (a “sponsored strategic”)? What’s the quality of that backing? Among financial buyers, are they a search fund, an independent sponsor, or a private equity fund with committed capital? What’s their history of doing deals?
Deals must align strategically, culturally, and financially. Early on, ask where the money will come from. By the time you sign an LOI—or shortly after—reciprocal diligence on their ability to fund is important.
For strategics using debt, the bank often needs a signed LOI to issue a commitment letter; you should expect that quickly post-LOI. If a strategic is PE-backed, the PE sponsor should provide a comfort letter stating that, assuming diligence checks out, they can fund. There are several proof points you can (and should) request—we’ll unpack those today.
04:27 | Ryan
Before we go deeper, a quick definition check. A strategic typically has a balance sheet and/or a banking partner; sometimes they’re backed by a PE fund with committed capital. Mike, expand on PE funds with committed capital—how does that differ from an independent sponsor?
05:23 | Mike
Most PE funds raise money from limited partners (LPs) who commit capital to a fund around a thesis. That committed capital is time-bound; the clock is ticking for the fund to deploy it. Established funds often also invest some of their own capital. In some cases—depending on deal size—they can even show you the account or otherwise demonstrate capacity. That’s different from an independent sponsor, which I’ll touch on next.
07:59 | Ryan
There are lots of definitions and moving parts—understanding the parties and their capacity helps.
08:13 | Mike
Right—and to your independent-sponsor question: an independent sponsor finds the deal first and raises capital after. A committed-capital PE fund raises first, then finds deals. With independent sponsors, funding post-LOI reduces certainty to close and often stretches timelines—six, nine, even twelve months while they syndicate debt and equity. That doesn’t mean it can’t work, but risk and timing are very different than with funded strategics or committed-capital PE.
10:09 | Ryan
Matt, let’s shift to proof. What legitimate forms of proof have you seen? What’s fair to ask for—and when?
10:56 | Matt
Start by classifying the buyer and their state. A large strategic with substantial cash on the balance sheet—or a well-established PE fund with sizable committed funds—requires less early proof than a smaller or first-time acquirer.
Where questions exist, it’s appropriate to ask earlier (it’s just business):
Who has final sign-off on releasing funds?
If there’s a sponsor/LP, can we speak with them about process and timing?
Post-LOI: obtain a bank commitment letter (for debt-funded strategics) or a sponsor comfort letter/evidence of committed capital (for PE-backed deals) once initial financial diligence is underway.
With big strategics/PE platforms that have executed multiple deals in the space, you may ask later; with smaller or debt-heavy buyers, ask earlier.
16:16 | Ryan
For PE buyers, proof might include a sponsor comfort letter, evidence of dry powder (fund/LP reports), recent deal announcements, or a debt commitment. For strategics, the balance sheet, bank letters, escrow evidence, or even a board resolution can help. We’ve even seen (on smaller deals) a screenshot of a personal account exceeding enterprise value.
Mike, what signals in deal structure—like heavy earn-outs or long seller notes—tell you about a buyer’s financial strength?
17:47 | Mike
It depends on the quality of the asset. If revenue/margins are lumpy, any buyer—strong or not—might propose more variable consideration to de-risk to a fair value. There’s often an inverse correlation between the headline multiple and certainty to close. If a deal looks too good to be true (well above market), proceed with caution: buyers who must “go find the money” will face extra scrutiny from their lenders/equity partners, which can jeopardize funding.
A structure with more contingency doesn’t automatically mean the buyer lacks cash; it may reflect risk-sharing based on the business profile. But combine an above-market price and high contingency with thin proof of funds—that’s a red flag.
21:02 | Ryan
Quick calibration: What’s typical cash at close in our space?
21:20 | Mike
Commonly 50–80% cash at close. The rest can be an equity roll and/or an earn-out. You might see 40% cash if there’s a meaningful roll plus an earn-out with high confidence you’ll exceed targets. Every deal is situational, but 50–80% is a good rule of thumb.
22:43 | Ryan
Right—so if someone offers 10% cash at close, that’s a sign to dig deeper (or look elsewhere). That’s where a good M&A advisor helps.
Matt, any lessons from situations where a buyer couldn’t raise funds as planned? What should sellers do?
23:38 | Matt
Ask for transparency on timelines and hold buyers to them. If they miss, apply pressure—let exclusivity expire or request to exit the LOI. Better yet, prevent issues by vetting funding paths early.
Markets can shift (e.g., credit volatility) and previously issued letters can get revisited. Keep “runner-up” bidders warm so you can pivot quickly. And throughout, keep the seller focused on operating the business; strong performance preserves options. A buyer who stumbles may return later with funding, but you shouldn’t be stuck waiting without alternatives.
27:11 | Ryan
Great points. Mike, bring us home: what’s the role of an advisor here?
27:32 | Mike
An advisor qualifies buyers and offers: financial readiness, strategic/cultural/financial fit, and overall certainty to close. We “stick-handle” the process—coordinating diligence, validating funding capacity early and often, and keeping you informed about trade-offs (e.g., higher multiple vs. lower certainty). The goal is a timely close with a vetted counterparty and a structure you understand.
30:06 | Ryan
Thanks, guys—big takeaway: a great multiple isn’t enough. You must evaluate structure, capital source, and track record. Ask for proof—and ask early.
30:40 | Mike
Sounds good, Ryan. With that, we’ll tie a ribbon on this week’s Shoot the Moon podcast. Tune in next week as we unpack more ideas around IT services M&A and growth strategy. Send topic suggestions to info@revenuerocket.com, and check out our website for helpful content if you’re contemplating growth, acquisition, or sale. Make it a great week.