How to Tell Whether a Buyer Can Actually Pay You

You are entitled to one sentence before you take your company off the market: this buyer can close, on these terms, with this money, or they cannot.

Almost nobody asks for it. Owners spend months qualifying their own numbers and then grant a stranger an exclusive period on the strength of an offer letter, a confident manner, and a reference to committed capital that nobody has read.

A term sheet is not a commitment

This is the single most expensive confusion in the process.

A lender’s term sheet describes what they might do. A commitment letter describes what they have agreed to do, subject to stated conditions. Those are two different documents with two different consequences on a closing date, and they are frequently talked about in the same breath by a buyer who knows the difference perfectly well.

The test is the one applied at the end of the negotiation, before anyone signs a purchase agreement: is the financing real? Not probable. Not indicated. Committed, from a named source, on terms that exist. Ask it at the beginning instead and you have saved yourself the whole argument.

What to verify, by who is asking

A strategic buyer. Where the cash is coming from, and who inside their organization has actually approved this. A division head with enthusiasm is not an approval, and the gap between the person in your meetings and the committee that releases the money is where quiet deaths happen.

A private equity buyer. Whether the fund has actually closed, whether it is inside its investment period, how much of it is left, and what else they are trying to close at the same time. A fund in its final months with three processes running has a capacity problem that is not yours until it becomes yours.

Anyone using debt. A signed commitment from a named lender, or a term sheet and an expression of enthusiasm. If the answer is the second one, the deal has a financing condition in it whether or not anyone has written that word down.

An individual buyer. What they are putting in personally, where it is sitting today, and what they are borrowing against. An individual whose equity depends on selling something else has two transactions to close, and you are the second one.

Deferred payment changes the question entirely

If every dollar arrives at closing, you are asking whether they can pay on one day. If any part of your price is a seller note, rolled equity, or an earnout, you are asking whether they can pay across years, and that is a different question with a different method.

The method is the one a lender would use on them. What does the combined company’s cash flow look like after the acquisition debt. What else is in front of you in priority. What happens to your payments in a bad year. Who is actually obligated, the operating company or a holding entity with nothing in it, and is there a personal guarantee or only a signature.

Owners accept deferred consideration as a term of price. It is also an extension of credit, and nobody extends credit to a borrower they have not underwritten.

The part that runs both ways

A buyer’s investigation of you is thorough, documented, and staffed. Yours of them is usually a conversation and a feeling.

It does not have to be. The same period that produces several hundred requests about your company is the period in which their fund, their lender, their approval process, and their track record of actually closing are all legitimate subjects, and a credible buyer expects to be asked. A buyer who bristles at being asked has answered the question.

And when part of the consideration is their own stock, the asymmetry disappears entirely. You have to investigate them the way they are investigating you, because you are about to own a piece of something you have not valued.

Ask before they are on the list, not at the end

By the time a buyer has exclusivity, this verification protects nothing. The leverage is gone, the clock is theirs, and the only remaining options are to close with whoever you have or start again.

The work belongs at the front: at the point the buyer universe gets built, and again before anyone receives the full picture of your company. Screening is most of the job in a sale, and ability to pay is one of the three things a buyer has to answer before they are shown anything substantive.

What getting it wrong costs

The failure is not that a buyer runs out of money at the closing table. That is rare, and it is obvious.

The expensive version is slower. A buyer whose financing is not committed negotiates differently. They need more conditions, because their lender needs more conditions. They need longer, because the approval they described as routine is not. They need the price to come down, because the underwriting came back thinner than they told you. Every one of those arrives as a reasonable request from a party you are already exclusive with, and each one is actually the same fact wearing a different face.

And if it ends, you have spent the exclusivity period, the other credible parties have moved on, and a buyer, their advisors, and their lenders all now know what your diligence turned up. Whatever you run next begins from there.

More on this: Being Paid in Paper Means Lending Part of Your Price Back.

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This is what we do. Prism Edge qualifies the buyer before the buyer qualifies you: who has approved the deal internally, whether the fund is real and has room, whether a lender has committed or merely commented, and what sits behind anything you are being asked to take over time. The one sentence you are entitled to is the output of that work, and it arrives before exclusivity rather than during it.

The full chapter on verifying the buyer, and the three questions that gate a purchase agreement, are both in The Business Sale, free to download here.