Legal entity for self funded search

by a searcher

1 year ago

I know there have been similar posts to this one, but haven't found anything that quite answers my question - apologies if this is a repost.

I'm planning to kick off a self-funded, partnered search, eventually intending to raise capital from investors for one or multiple acquisitions. I know eventually I'll need more formal legal advice, but wondering whether this is necessary before having a specific deal and capital need lined up. Is it safe to start a simple LLC to push search expenses through, and deal with the legal structure of the acquisition when the time comes, or do I risk closing options off to myself preemptively?

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searcher from The University of Chicago - Booth School of Business

Not legal advice, but if you are US-based and have outside investors I have been recommended to set up a Delaware LLC to 1) use it for NDAs 2) have it as parent of the acquisition entity (professional investors normally require parent entity to be in Delaware.

1 year ago | like reply | 2 likes

searcher from Carnegie Mellon University - Tepper School of Business

If you're doing a partnered search, form an LLC and work out an operating agreement. These things don't have to be done through a lawyer, but a good lawyer with a lot of experience in working with partnerships can add a lot of value in terms of thinking of potential problems down the road (contracts are there for when problems happen). For instance, what if your search LLC has incurred a bunch of expenses in diligencing a deal and then one of you wants to back out while the other one wants to go forward? How will costs be split and who will own the new company? It's for your to decide, but it would be useful to have it written down beforehand. And the SBA will ask for your operating agreement anyway.

I formed a search LLC when I began my search, used that entity to form my acquisition entity (the entity I sold to investors) when I got a bank commitment letter, and am using the acquisition entity to acquire the target company.

1 year ago | like reply | 1 like

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