Legal entity for self funded search

searcher profile

January 17, 2023

by a searcher in Boston, MA, USA

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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Reply by an investor
from Carnegie Mellon University in Philadelphia, PA, USA
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.
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Reply by a professional
from University of Michigan in Dallas, TX, USA
Generally my recommendation to folks (with few exceptions, such as if you're in CA where costs are much higher) is that forming a search LLC, even if you don't use it for your acquisition, is low cost insurance. Couple hundred bucks to do and you get a lot of benefits with no real downside (other than cost).

You don't preemptively close off any options because you don't have to use your search entity to actual complete an acquisition. In fact, there are some benefits to doing your search (and signing dozens of NDA's) with one entity, and closing your acquisition with a separate entity. You can then take the time when structuring your acquisition to determine the right vehicle for that (LLC, C Corp, etc.).
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