We thought we were close to closing a big deal, but the prospect is now asking for us to provide something we don't have. What do we do?

Q: We’re far along with a large company for a big contract. The deal champion and budget owner are on board, but an internal process department is asking for audited financials, which we don’t have?and would?be onerous to obtain. We’ve provided unaudited financials (balance sheet and P&L). Still, the deal seems to be stuck. Is this a typical request to be made of an early-stage company? What should we do?

-Founder of a Series A Company

Dear Founder,

This is a great question. It doesn’t happen often, but this could come up as not?every large company?is comfortable doing a deal with an early-stage company and taking on the associated risk. Some larger companies don’t want to take?the?chance on a major project not working out because an early-stage company can’t deliver?or doesn't survive.??

I wanted to provide the most thorough answer, so I consulted with three CFOs who are affiliates in the Webb Investment Network . I’d like to thank Cheryl Dalrymple ,? Michael Fleisher and? Bill Ruehle for sharing their experience and advice. This response reflects their collective wisdom.

First, in this case and in future situations, make sure you understand the process that the deal will go through (likely some finance or purchasing team sign off) so you can get ahead of the “early stage” issue by helping educate everyone on the deal team before questions are asked. Instead of waiting for something to come up, be proactive about where the company is and what documentation you can provide.

As a next step, it would make sense for the head of finance?(or the CEO if you don't have a head of finance yet)?to have an in-depth discussion with the folks on the potential customer’s side. I would ask if they could please share why they are asking for audited financials?and what their concerns are.?Typically, they are thinking about whether the company will stay in business. Assuming you have plenty of cash on hand (two years), I would provide them with cash flow statements (in addition to the P&L and balance sheet). This should help people get over the hurdle.?

There’s probably not enough time to get audited financials?as it typically takes at least three months to get the first year’s audit statements?completed.?I would agree?to send the audited financials when available and in the meantime work on getting other documentation in order.?It may be too early to work with?a Big 4?accounting firm but there are local firms that are less cost prohibitive.?Although it likely won't be done in time to get your current deal approved,?getting a firm on board now is helpful because it will become necessary in the next rounds of financing and is good fiscal discipline.?Additionally, most “investor rights” provided in financings indicate the timetable that audited financials must be completed.??An alternative may be to have a “review” (versus an “audit”) of the financials performed by an accounting firm, as this is less costly and?performed?more quickly.?Eventually, all?"reviewed"?financials will need to be audited at some point, however, if you have financial investors backing the company.?

A route that might be easier, and more immediately successful, is to leverage any “third party” that can help validate the “security/safety” of the company.?This is generally most effective with?your most?prominent equity investor?or sometimes?a bank lender. Hearing from equity/debt investors can help make the finance/procurement team more comfortable. Investors can be great salespeople and we find that?companies enjoy talking to VCs?to build their own relationships with the?firms.?You should have your most prominent investor make sure they cover things like why they invested, how excited they are about the company and how they are looking forward to investing in future rounds. (Note: this is not a commitment!)?

Hopefully your champion is excited enough to help you through bureaucracy and?waive the requirement on this round if you promise to?share?audited financials?when completed.??In all the years we’ve been doing this,?none of us know of a company that lost a serious contract for not having audited financials at this stage;?it's really a selling exercise to prove why your company will be successful and around in the future.??The good news is that you have a deal champion and the company loves and needs what you are offering, so hopefully you can soon go back to focusing on providing that.

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