How should I respond when a customer demands my financial statements?

Received this email today. A customer approaching the end of their trial period is demanding my financial statements. How should I respond?

As part of XXXX's supplier management program, it is essential that our Firm understands the financial health of our suppliers. To address this need and to comply with Federal guidelines on vendor management, XXXXX performs regular and formal assessments of our suppliers. It is critical that in this process, we receive your cooperation with full transparency.

In order to conduct the evaluation, please provide and forward the following information to XXXX.

1. Company descirption, organization, location and number of employees, total number of customers.
2. Current profit and loss statement and balance sheet (indicate if they are audited and by whom)
3. Describe any current funding or sources of funding (IE institutional investors, bank line, etc)

We have included a formal non-disclosure agreement covering any non-public corporate financial information that you disclose."

This information should be provided in ten business days of receipt of this letter. If you don't respond, your company will be flagged as non-responsive and high-risk to the firm.

You don't have to comply, the risk of course is losing the client.

I have seen requests like this a few times in the past. They are usually just replied to with a polite, "No thanks" kind of response.

It's also highly likely that your customer uses this new found knowledge of your company to negotiate their price down. IMO, I think it's a losing proposition either way, I would politely refuse to provide that information, I doubt yours would be the first non-response they had received.

I would ask them to provide you with the exact Federal laws or Guidelines that require you to provide confidental information to them. I would also request they supply you with this information in writing.

If you are a privately held small business, below 20 - 25 employees, you are exempt from most goofy Federal rules in any case.

If you decide their business is worth the disclosure of your private financial data, I would modify their non-disclosure agreement requiring them to certify they will not compete with your firm.

This could just be a fishing expedition to see if you are profitable enough to clone.

It could also just be insanity propagated by their accounts payable department. We often get RFPs or Purchase Order requests that ask us to fill out 5, 10, or 20 page forms so they can issue a PO. We always answer that we will be happy to work on their request, but we charge $50 per page (and the page count includes their instruction pages) and $100 for each phone call we must make to them to figure out their paper work. They always drop their request for the forms and go ahead with the purchase.

Finally, I have never seen a request like this in my 33 years in business. I have had customers, buying very expensive licenses (> $20,000.00) who wanted us to put our source code in escrow, If they were willing to pay for the process, we were happy to comply. But on a $2,000 order there is only so much effort we are willing to expend. It all comes down to how much you need this order.

If your client is a large company, it's totally plausible that this may reflect a new or existing policy. So job #1 is to go to your primary contact in the organisation and show and tell. Explain to them that this isn't at all a usual request, so you just want to find out if this is genuine, and ask them to introduce you to a human being in the purchasing department (or wherever this has emanated from).

That gives you some protection: you're making contact with your customers, which is always a good thing. And you're going with them into a conversation, which makes it slightly less attractive for them to follow through on the "that's just how it is, do as we say or you're toast" line, because it turns out that won't just hurt a supplier, it will hurt them too.

Ideally, you're going to not comply with this. Why? Because playing the "what's the more likely reason they want this information" game, one of the higher placed plausible answers is, "because they've decided to identify and squeeze smaller suppliers - squeeze them out or squeeze the rates or payment terms." On the other hand, "because the CFO really cares for each and every supplier and wants to be a better customer" is not all that likely, given the thrust and tone of the communication!

In the end, you may be forced to comply (although this information request seems way to broad and way too deep). In which case, stick real close to your users in the company, and involve your primary contact all the way. Look for opportunities to 'tick the boxes' without disclosing more than a bare minimum of information, and certainly nothing you regard as confidential. Business users rarely love the purchasing department - so played the right way you may deepen the relationship...

This kind of thing used to be far more common than it is now. And a lot of times, the answer for startups was often, if you're selling to the Fortune 500, you need to sell through an established company, such as a major IT reseller: they'll take a cut, and they'll insulate you from the corporate Purchase-to-pay process.

Oh, and if the client is not a large company, many of their suppliers are really not going to be completing such a profile. And nor, in all probability, should you. Though you might (to be on the safe side) want to check their current credit score and recent history.

In 14 years I have done business operations I have NEVER seen that kind of demand. Companies I've worked for did federal, state, and local contracts. In one of the companies Air Force was our customer and also bunch of large financials institutions.

Some of the strongest MSAs we have ever signed had several clauses allowing client to audit our financials, but only portions pertaining to just that project, since it was T&M contract. Not a biggie.

As with any of these "demands", you can get out of them and still continue doing business. Good ops person knows every trick how to do that, since we do that every day.

Let's make the following assumptions:

• That the email actually comes from your customer
• That you have contacted your account representative and confirmed the details of the letter.
• That your contract has a term which does not allow them to cancel based on being "flagged" as non-responsive
• That you are very hesitant to provide this information.

I would consider the following:

While putting together the information in a manner that best reflects the financial stability of your company --

Set-up a good meeting with your primary contact and discuss frankly your issues and concerns. See what the "costs" are to you so that you can make an honest assessment of your options.

If you choose to provide the information -- then great. Make sure that it is properly covered by NDAs.
If you don't -- simply provide a clear response letter which does the following:

• Identified a clear understanding of their concern and needs
• Clearly articulates what information you will not be provided and why
• State that you look forward to meeting with appropriate people to discuss their concerns.

Note: that stuff about Federal guidelines is patooey for you. Don't let them bluff.

Something to Consider:

One of the biggest challenges I have experienced in doing B2B business development has been supporting small companies and start-ups that are trying to sell into major corporations that have well established vendor management systems. So often the rules and guidelines that they develop are completely antithetical to the small and midsize business. They have appropriate concerns that they will choose a vendor that disappear over the course of the contract. They have appropriate concerns of becoming reliant on a software that disappears.

Over the years I have found that the only solution is having someone who loves you inside the company. One of the places to get that person is in their program that supports the diversification of the supply chain. If your company fits any of the traditional classes of encouraged companies you may find an advocate for yourself that has knowledge and relationships to assist you when the "corporate rules of conformity" create an unequal playing field. If you don't -- go for it anyway, use it as an access point to develop an advocate.

Looks like some typical corporate BS. We often get RFP's that want us to fill out all kinds of financial data and we rarely do... it is really none of their concern. They probably work in and industry such as automotive or something like that where it's possible that some of their vendors have not been profitable for years, are in poor financial standing and could go out of business at any time. So, it's probably designed for some manufacturing agreements that really don't apply directly to software / products but their accounting department follows the same practices for all their vendors.

A] Comply - if they are a large company it's probably no big deal as long as you are profitable that you make < 50k a year as long as you aren't losing money.

B] Tell them you appreciate their intrest in such information but you are a privately held firm and that information is only available to the firms partners. The basis of your relationship is on the product you provide and you are in fine standing with your bank, other clients and are a profitable business.

But I imagine they are a large company, or deal with large vendor transaction such as parts or buy large amounts of inventory. They don't want someone they depend on for production to disappear. But they want all their vendors to go through the same steps. "Federal Guidelines of vendor management" sounds made up ;)

I'd ask for more information on the "Federal guidelines on vendor management", and comply with just those parts.

I'm surprised by the number of answers saying don't give any information; hasn't anyone ever been burnt by a financially instable vendor disappearing suddenly? Federal guidelines aside, what they want to know is: "If all your other customers disappeared, how many months would you be in business based on just our income?" And, if that number is low, how likely is it that all your other customers will disappear?

You're a small business and therefore going to be a higher-risk vendor than, say, IBM. But they still want to be your customer, either because you've some special skill or because you charge less than IBM do. This is balanced against the vendor risk.