Most buyers are not qualified for a $250 Million USD transaction. That’s an approximate cost for a 10 Million boxes of Cranberry Evolve, and as or if the quantities get higher, the quality of prospective qualified buyer is even lower. By *qualified*, I mean that the companies do not have earnings and thus liquidity of their own to purchase the goods. And to qualify for financing, they would have to meet the risk requirements of the financier.
The number of unqualified buyers is not unusual for all sorts of commodities, including agricultural or precious metals or fuel. The reason for this is the number of parties that are attempting to participate in an arbitrage. What’s an arbitrage? That’s the profit derived by a middleman – purchasing for one amount and selling for a higher amount.
Where Middlemen Fit in
The reason that these middlemen are able to profit is because they are representing someone else’s funds and they are participating in the delta between the purchase and exit price. Since they are not an owner of the funds, their profit is not derived by purchasing the goods with their own funds, but representing the financial capabilities of another. In many markets, this is an appropriate transactional structure with several caveats regarding the accurate and authorized use of funds, etc…
If you first understand the profit motive and the low barriers to entry for any company to try to participate in a highly profitable transaction, you can approach each engagement with a healthy dose of skepticism.
The benefits of being skeptical and thorough are the following:
1 – You will spend less time on unqualified buyers whom you cannot help.
2 – You will improve your relationship(s) with prospective suppliers as someone who bring qualified buyers and who adds value in the engagement.
3 – You will be able to truly help the buyer as you will have a more comprehensive understanding of the buyer’s financial capabilities and the financial logistics and limitations
How to Go about the Process of Analyzing and Vetting a Prospective Buyer’s Qualifications
Company Basic Statistics
Companies are registered in each state and information about the tenure of the company and it’s officers may be available at the SOS website or aggregated through a number of other services like Dun an Bradstreet or other Corporate Business aggregators. These are good places to start to see how long the company has been in business and who the registrants are. Then you can look up the professional profiles of the officers of the company, and review their websites to understand what they do, what their products are, and who their customers are.
- Check for expired company registration
- Review Linkedin Profiles of Officers
- Ask what their role is in the transaction. Will they sign the contract? Do they own the funds?
Earnings and Liquidity
Companies that can purchase hundreds of millions of dollars of goods have been in business for many years, they have customers and operations and sufficient earnings (profits) that are available to purchase the goods. They “earned” the money.
- Tell me about your business model in PPE?
- Take me through how you wish to transact and how the money will move.
- Tell me about your business and it’s operations?
Credit Facilities & Capital Partners
If the buyer claims that they have a Capital Partner or Credit Facilities, ask them to explain and identify the source of funds (“SOF”). The SOF will have earnings to substantiate the purchase of the goods and a business model adept to lending funds to 3rd parties. In some cases, prospective buyers don’t want to disclose their SOF, but you can start with the following questions.
- Can you identify the economic owner of the funds (“EOF or SOF”)?
- Tell me about the business of the EOF? What kind of company fund?
- What is your contractual relationship with the funder? How do they profit?
- Tell me about the principals at your firm (they will have significant finance expertise)
Asking about Logistics
A company that is interested in purchasing the goods will have a thoughtful and detailed plan for moving the product. They will be able to explain whether or not they have their own logistics in place and will have realistic expectations of how much of the product can be moved in a specific amount of time.
Glean from the Company’s KYC
Whether or not you have a company “Know Your Customer” (“KYC”) in-hand or you ask for the following specific information, in order to do proper due diligence on the company, you will want to know A) The legal name of the business B) the Key Principal (Who will sign the contract) C) The name of the attorney who represents them and D) The name of their financial institution.
Attorney Trust Accounts
Attorney escrow and IOLTA accounts are trust accounts. That means that the funds are legally held in the attorney’s care “trust” with the expectation that they must execute their fiduciary responsibilities according to their agreement and/or ethical obligations to the owner of the funds. Funds are not typically moved to an attorney’s care without good reason. Most of the time, funds that are in the care of an attorney are owned by someone other than the company that is representing themselves to be the buyer. Therefore, it’s helpful to ask “why” the funds are in a trust account? And who does the attorney represent? Considering that the funds are in an attorney’s trust account, it can be difficult to verify the funds, other than an attestation or statement from the attorney.
Proof of Funds
This is always a sensitive topic, but you will glean a great deal of clarity on the economic ownership of the funds with a few questions about how the buyer will demonstrate proof of funds for the transaction? A Letter of Attestation is always someone else’s funds in an attorney’s escrow account. All other statements are preferably verified by a banker, which would require an “Authority to Verify” (ATV) letter. Funds can either be verified or blocked for confirmation. All other proofing methods should be met with more questions about the ownership of the funds and who has authority to use them.
You don’t really need any documents
You don’t always need any documents as companies with hundreds of millions of dollars in earnings or liquidity are relatively easy to confirm the veracity of their commercial profile. Use these examples to help you with a thoughtful and consultative dialogue to help advise, advocate and structure a successful engagement.
