We're a 12-person specialty manufacturing shop doing about $3.2M revenue. Two corporate suitors walked away after their finance teams ran our balance sheet. They both had internal policies requiring acquisition targets to carry a minimum net worth (one said $1.5M, the other $2M, both at closing). We're asset-light and carry maybe $700K in equity. So now I'm wondering how common these thresholds are and whether I should bulk up the balance sheet just to get past the gate, or just focus on buyers without that rule. Anyone run into this?
Buyer Pool
How corporate financial net-worth requirements affect your pool of buyers
Very common with strategic buyers. They don't want to buy a company that's technically insolvent the day after closing because the seller stripped working capital. $700K equity on $3.2M revenue isn't crazy for asset-light, but if the threshold is a hard policy nuumber, you're not negotiating it away. You're either increasing net worth or crossing them off.
yeah my company has a similar rule and it's mostly about balance sheet risk. I'd find out which line items they look at. Some of these “net worth” tests are really tangible net worth tests, so goodwill and intangibles get excluded anyway.
Not every net-worth test is created equal. If it's total equity, a subordinated seller note could inflate your equity on paper. If it's tangible net worth, that trick's dead. Ask the second buyer for their exact definition in writing before you decide anything. They've already walked, so nothing to lose.
Corporate policies exist so some junior analyst doesn't get blamed for a write-down later. That's it. It's not really about your business
This tracks. We tried to sell our print shop to a regional consolidator and got bounced at the very first financial screen because our equity was under their threshold. Went with a PE shop instead and closed fine, but the diligence was heavier. Different buyer, different hoops.
Some of these suitors might also be using net worth as a way to pick off distressed owners. Poke around, sometimes “policy” is just a euphemisM for lowball.
Update, sort of: both were strategic buyers. One regional, one national. The national one actuallhy sent over a diligence checklist with the net worth minimum buried in a footnote. Funny the things you learn after the fact.
footnote net worth rules are the corporate equivalent of a bouncer who lets you in and thne checks your ID at the bar
Were either of those policies tied to the deal size specifically? Sometimes it's treasury deciding acquisitions under a certain size have to clear a net-worth/cash test regardless of industry. Worth checking if reducing your ask below $5M or whatever gets you out of that particular bucket.
Also don't rush out to borrow or raise money just to satisfy a policy number at one buyer. That's an expensive way to chase a single deal. And if your revenue is growing, the equity base might look different in 12-18 months anyway.
I'll ask both for the written definition of net worth. We're not in a rush, which is probably a luxury not everyone here has. Appreciate the sanity check.
Good luck. Also please report back if you learn the footnote was actually negotiable. I have a feeling it wasn't, but I'd love to be wrong.