Have you ever submitted a high volume, low risk deal to underwriting, only to have it declined due to weak financials?
Here’s what you need to know before you spend time working the next big deal.
One of the things always top of mind for acquirers is mitigating financial risk. Higher stakes with large volume deals means more exposure. Add in another risky component like future delivery and the stakes get higher, so the underwriting requirement list starts to get longer.
At a minimum, they’re going to want financial statements and bank statements. They’re trying to assess whether this company has the resources it needs to continue operating indefinitely, that it will make enough money to stay afloat and avoid bankruptcy. They’re also looking for activity on the bank statements that aligns with the company’s business model.
It’s not hard to do a cursory review yourself before spending a lot of time on it. After all, there’s a lot of work involved in assembling a package for underwriting. Plus, it’s not beneficial for you to be involved with failing businesses, whether you hold liability or not.
Here are some quick hits to figure out how healthy a company is:
✅ Current ratio: this measures whether a company has enough assets to meet its short-term obligations. Divide current assets by current liabilities. In general, the larger the number the better, and anything less than 1 can be concerning.
✅ Net income: Are they profitable? If there are losses, are they trending in the right direction? Where does funding come from to cover losses? Do they have enough runway to make it to profitability?
✅ Does the balance and activity in the bank account make sense given the business model? Is there cushion to cover unforeseen circumstances?
✅ Does the company have significant debt obligations that could be difficult to meet with any decline in income?
✅ Do the financial statements make sense given the business type? If it’s future delivery, they should have a liability line item that shows you exactly what they owe for products/services that haven’t been delivered.
Even if you’re intimidated by accounting, you can learn the basics to best position yourself to help the merchants that will be around for years to come.
And remember, acquirers like to come from a place of Yes, too. They like to add volume and margin just as much as you do. But they’re careful to weigh financial risks against potential gain. After all, when things go south, they are usually the ones left holding the bag and covering the losses. And no matter how seldom it happens or how small the dollar amount, a loss hurts just the same.